By now you should be convinced that the direction of interest rates is the key to the future of stock, bond and real estate prices. But what can you use to predict future movements in interest rates? First, a disclaimer. Nobody can consistently and accurately predict interest rates and that includes me. But, given that there is so much at stake, one needs to make a bet.
What to look for? In the first week of July, we will get the growth of employment figures for June. If these numbers are smaller than expected, the party is on again. Stock prices will jump, rates will come down and we can all expect the Fed to continue pumping money. However, if the numbers are larger than expected, and thereby confirm the Fed’s recent forecast that the economy is growing, you can expect another jump in interest rates and another slump in stock and bond prices. If the employment numbers come in as expected, not much will happen.
So, watch for June’s employment numbers. They are critical at this juncture.
What Else to Watch For?
Here are three other things you should keep your eyes on: inflation, China and Greece. Why?
Inflation is super low right now but it has the potential to accelerate and this will rise interest rates too. Why might inflation accelerate? Because if employment numbers come in stronger than expected next month, this will confirm that the economy is growing more vigorously that thought and that might encourage business people to do something they have not been able to do for the last few years. That is, raise prices. If they do this, you can expect inflation to accelerate, and therefore, interest rates to rise even further. More carnage in the markets will follow!
Why watch for developments in China? Its growth rate has been outstanding for the last few decades, but economic cycles exist. China could be hiding some serious financial problems due to credit and this could cause serious problems.
Why continue to monitor Greece? They are not out of the woods yet. They are supposed to continue to cut governments jobs, and they may tire and give up doing so. Then, a new European crisis would follow.
Don’t Forget: Watch for July’s Employment Numbers
In sum, if the employment numbers that come out in the first week of July are strong, you can expect business people to feel more confident and they will begin raising prices. That will result in higher inflation and higher interest rates. This in turn will lower bond prices, begin to negatively affect the real estate recovery and may continue to hurt stock prices.
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