Could be two-to-three months of core CPI prints of 0.3%, which the market hasn’t seen in over two years, and it might not know what to do with that either.
Back in the last commodity boom we did have a period from the fall of 2007 to the summer of 2008 when core CPI came in at or above 0.3% no fewer than four times. (It is unlikely that the U.K., euro zone, India, China, Brazil and practically the entire planet is openly grappling with an inflation spike and that this will bypass the U.S.A.). While it ultimately proved brief and the bond selloff was a great buying opportunity, the yield on the 10-year U.S. Treasury note did jump 80bps over a two-month span, to 4.2%; and recall that spasm occurred as the recession deepened.
The equity market has managed to navigate through the election, health care, Europe, Egypt, double-dip fears, but it has yet to show much of an ability to deal with 4% Treasury note yields. This could very well upset the apple cart in coming months.
via Dave Rosenberg, Gluskin Sheff 2011-02-03