Investors are being distracted by the rise in commodity prices, which is being taken as an indication that inflation pressures are building. Unfortunately, that's just not the case. Some rise in inflation would be welcomed by the Fed, but it remains somewhere off beyond the visible horizon, even as economic growth prospects continue to brighten.

The surge in wheat, copper, crude oil and other commodity prices are not evidence of rising inflation pressures. They are the result of harsh weather or spot shortages, neither of which is likely to be sustained. Food prices have responded to weather problems in Russia and Australia, but it is a safe bet that everyone, including the Russians and the Aussies will plant every acre available to benefit from the rise in agricultural prices, which will bring those prices down in due course. Industrial commodities prices have also increased, stoked by very strong demand from China, which is buying raw materials as an alternative to buying more dollars. Even so, raw materials are a minor factor in the cost of producing goods and services. Labor, which accounts for roughly 70% of the cost of producing GDP, is vastly more important and those costs remain muted. Moreover, productivity gains exceed the rise in labor costs, so unit labor costs continue to decline. Until unemployment declines significantly, labor costs are unlikely to accelerate. This is hardly the environment in which inflation might rear its ugly head.

The good news is that the economic data shows that the economic expansion is picking up speed, January's modest increase in payroll employment notwithstanding. (Weather has obscured the improvement in the job market that is evident in the rest of the data, including other labor market reports.) Still, exactly as stated by Fed Chairman Bernanke, it is premature for the Fed to stop providing liquidity to the market until recurring, stronger employment growth indicates that the economic expansion is well entrenched. A few months of stronger job growth is insufficient. The pace of growth must be vigorous enough and sufficiently entrenched to overcome any adverse shocks, whether a default by Greece, an uprising in Egypt, or a conflict with Iran or North Korea.

All of the above suggests that monetary policy will remain supportive for growth over the coming months, although investors are beginning to anticipate a healthier economy and to drive up long-term interest rates. So, the outlook for bond prices remains quite dismal. However, the outlook for equities remains symmetrically positive. Furthermore, the market gets it, as evidenced by the rise in stock prices and the weakness in bonds. Expect more of the same.

 

About Advisors Capital Management, LLC

Advisors Capital Management, LLC (ACM) is a provider of privately managed portfolios and financial planning services for industry professionals and direct clients. Although the information included in this report has been obtained from sources ACM believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. ACM is a registered investment advisory firm. For program fees and descriptions please request a copy of the firm's ADV part II Schedule F. Web Address: www.advisorscenter.com 777 Terrace Ave, Hasbrouck Heights, NJ 07604 Phone: 201-426-0081

(c) Advisors Capital Management

www.advisorscenter.com