There has been much discussion and anticipation regarding when higher food and energy prices would begin to filter through to so-called core sectors of the economy. The day of reckoning may be upon us.
Late this afternoon, Dow Chemicals announced that it will raise prices as much as 20%. This could put pressure on some of its customers (PG, Unilever, etc.) to do the same. This was reported by both the Wall Street Journal and Bloomberg News. Bloomberg News also reported that Hershey Foods was considering price increases.
The yield of the 30-year government bond topped 4.70% on inflation fears. It had been rallying when oil prices rose due to flights to safety. This correlation in no more. Inflation will not rise unabated unless the Fed permits it to do so (unlikely) Also, higher energy prices should result in reduced consumption (to some extent), increased incentive to tap other energy sources and reduced consumption of products and services whose prices are pushed higher which should limit inflation. In the meanwhile, look for the long bond to top 5.00% by Mid-July and a 4.50% 10-year note.
Financial stocks will take it on the chin, but rebound in 2009 as more writedowns and major shake-ups lie ahead. This is a golden opportunity for investors who can look outside the box and deal with some volatility.
Someone answer this question for me. Why aren't more investors buying extremely cheap municpals? They are trading with gross yields which are higher than corresponding treasuries.
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