Financial market bulls appear to have been given the green light by Federal Reserve Chairman Jerome Powell to double the stakes that price pressures will only intensify in the coming months.
The renewed mojo for reflation trading follows Powell’s confirmation this week of the central bank’s intention to let the world’s largest economy boom for a while until it recovers from the pandemic. The Fed’s unwavering commitment to ultra-weak policies in the face of sound economic data is what has caught traders’ attention. It gained additional significance as it coincided with signs that infections were disappearing again in the United States, and until President Joe Biden unveiled plans for trillions more in fiscal spending.
Investorsall this is not ready to give the Fed the benefit of doubting its assessment that inflationary pressures will do so proves temporary. A key indicator of inflation expectations in the bond market for the next decade has just reached its highest rate since 2013. exchange traded fund for securities protected from inflation. Globally, there is a net inflow in mutual and exchange-traded inflation debt funds for 23 consecutive weeks, according to EPFR Global.
The Fed emphasizes that the rise in inflation “is transient, but we are unlikely to have much clarity on this statement until this initial economic wave of recovery subsides,” said Jake Remley, senior portfolio manager at Income Research + Management, who controls $ 89.5 billion. “Inflation is a very difficult macroeconomic phenomenon to predict in normal times. The uncertainty of a global pandemic and a dramatic economic leap made it even more difficult.
Ten-year TIPS provides reasonable insurance policies against the risk of inflation over the next decade, Remley said. Securities traders bet that annual consumer price inflation will average about 2.4% by April 2031. The measure is growing from the depths of last year, when at one point in March it fell below 0.5%.
“We want it to average 2%,” Powell said this week of the Fed’s inflation target. “And for that we need to see the inflation expectations that correspond to this, really well fixed at 2%. We still don’t see that. “
The central bank has a long way to go to achieve this goal. Its preferred inflation rate finally rose above 2% in March, clearing that level for the first time since 2018. However, Powell reiterated this week that he sees the move as part of a general trend of one-time price increases when the economy opens. . He also said employers are still not raising salaries.
Growing commodities add momentum to the trade in reflation. Fiscal and monetary stimulus has helped metals ranging from aluminum to iron ore, and housing prices are rising. It is also expected to present another stable job report next week, with forecasts forecasting profits of more than 900,000 for the second month in a row.
Against this background, the profitability of the 10-year treasury is likely to move to 2% or higher in the next few months – from just over 1.6% now – and at zero inflation will continue to rise, said Craig Brothers, senior portfolio manager and co-chair of fixed income at Bel Air Investment Advisorswhich manages over $ 8 billion.
“It simply came to our notice then perfect stormA “C” economy that gets all the benefits because the Fed stands aside and Washington helps as much as it can, “he said.” What I’m worried about in terms of inflation is that the main areas are a lot of people. I feel itwhich are in food, energy and shelter, all are increasing at a very strong rate. “
Bond traders have another big event on their radar next week. The Treasury unveiled its quarterly issuance plans on Wednesday, and most bond dealers expect to announce a $ 126 billion debt recovery in debt, same as february.
It is expected to once again cover $ 58 billion in three-year banknotes, $ 41 billion in 10-year banknotes and $ 27 billion in 30-year bonds, which will be sold in the week of May 10.
However, many companies say the finance ministry is ready to start cutting notes and bond sales later this year as funding needs peak. Some also pointed to possible cuts to 20-year government bond auctions resumed sales last year after a long hiatus.
What to watch
The economic calendar:
- May 3: Markit American Manufacturing PMI; construction costs; ISM production
- May 4: Trade balance; factory orders / durable goods / capital goods
- May 5: MBA mortgage applications; ADP employment; Markit US Services PMI; ISM services
- May 6: Challenger job cuts; non-farm productivity; unemployment claims; Consumer comfort of Langer
- May 7: departmental payrolls; wholesale / commercial stocks; consumer credit
- May 3: Powell talks about community development
- May 4: Mary Daly of the San Francisco Fed; Robert Kaplan of the Dallas Fed
- May 5: Charles Evans of the Chicago Fed; Loretta Mester of the Cleveland Fed
- May 6: Kaplan; Master; Fed Financial Stability Report
- May 3: 13-, 26-week bills
- May 4: 42-day cash management accounts
- May 6: 4-, 8-week bills
“With the help of Elizabeth Stanton.”