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The market's inflation expectations and the outlook for growth remain tightly bound. The new abnormal, in other words, rolls on. Implied inflation, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries, continues to rise, right along with the stock market's climb. This positive correlation dance confounds some pundits, although some simply ignore it. Recognized or not, this relationship endures, and it's important to understand why.
The trend of the stock market rising in sympathy with the inflation forecast is, of course, abnormal in the grand scheme of U.S. economic history. But the relationship's persistence is a sign of the times"¦ still. Indeed, this abnormal state has been the rule for several years. In case you didn't notice, something changed in the fall of 2008 and the blowback persists on a number of fronts--relations between risky assets and pricing pressures being one example, albeit a critical one.
Based on yesterday's close, the Treasury market's implied inflation forecast for the decade ahead was 2.37%, the highest since last August. Meantime, the S&P 500 yesterday closed well above its previous highs of last year. In fact, the S&P finished the trading session yesterday above 1400 for the first time since 2008.
What's going on here? Economist David Glasner has the answer:
Posted by jp at March 16, 2012 8:22 AM
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