Analysts at the Daiwa Institute of Research believe the global economy is in a sweet spot and could remain here for quite a while. With the Fed on permanent hold Daiwa thinks the economy will remain in a sweet spot until the they decide to move on interest rates:
“The current global market environment can be called a sweet spot, where both stock and bond prices are enjoying highs. In historical terms, sweet spots come to an end when central banks raise policy interest rates to counter overheating economies or growing inflationary pressure. Thus, it is reasonable to think that the main theme of global financial markets will shift from the economy to inflation.
Because prospects for inflation remain quite low (see here for more) Daiwa says the sweet spot for equities could be sustained throughout the remainder of 2010 and that is an overwhelming positive for equities:
“We believe that the sweet spot for global financial markets will continue at least through 2010, a view that is supported by (1) prospects that inflationary pressure will be limited in China for the time being and that the effect of monetary tightening will be small and (2) the likelihood that prices will be stable in the US due to only a marginal increase in unit labor cost.”
Of course, this all appears well and good in the near-term, but as Jeremy Grantham says, this approach to monetary policy could prove disastrous in the long-term.