The People’s Bank of China, after Asian markets closed, said it would raise key lending and deposit interest rates to combat rising inflation pressures. China’s GDP growth is about 3 times that of most western countries, including the U.S. Keep an eye on our rates as well – the 10-year treasury is slowly (once again) creeping up towards 4%, and is now at a nine-month high of 3.65%. I believe, once it breaks-through that 4% level, that rates will push significantly higher.
Home prices were down significantly in December and Beazer Homes showed a 24% drop in profits for the quarter (reported this morning). Rising rates will not be kind to real estate prices – it will be the other shoe to drop. We have already experienced more than a 40% decline in local Santa Barbara prices, even with rates remaining at historical lows.
Many stocks are hitting all-time highs, or multi-year highs, with 19 of the 30 Dow stocks at (at least) multi-year highs, as of this morning. One could view this as a positive sign that the economy is improving and that stocks will push higher, or one could see this as a very risky investing environment. I lean towards caution.