Key Variables to Watch in the Coming Months

Posted by admin on January 31, 2011 under Banking, Government, International, Macro Economy, Real Estate | Be the First to Comment

• The bond market – will longer term rates increase significantly or stay steady? Quantitative Easing 2 (QE2) will end by mid-year keeping demand for 10 year Treasuries up (pushing down yields), but will investors react even more negatively to long-term debt prospects and price in greater risk. Also will they factor in the trend in long-term oil and commodity prices – thereby adding in greater inflation expectations into their desired yield?
• Emerging market economies, especially in China, and how aggressive they are in attempting to curtail inflation in their country — possibly putting them in a recession. Higher levels of inflation in China should keep their currency weaker, but that’s assuming the Yuan were freely traded on markets as opposed to being pegged to the dollar. If the Chinese cool down their economy to control inflation, worldwide demand for oil and other commodities will weaken, hence reducing inflationary prospects around the world.
• Aside from increase commoditiy demand in the developing world, will development in the northern Africa and the Middle East cause oil supply disruptions and an increase in prices?
• The degree of price stability in US real estate market – will bonds and mortgage interest rates stay low, thereby providing support for real estate prices. QE2 seems to have been primarily designed to do this.
• The trade-off between dramatically growing state and local government spending which can result in higher taxes like we saw in Illinois or substantial layoffs as we are more likely to see in Colorado. The municipal bond market could be problematic as state, local government and school districts run short on cash.