- Rising bond yields begin to cause concern
- Price rises beginning to feed through with commodities at the vanguard
- Cautious UK lockdown easing plan to be unveiled formally later today
Are things like inflation and rising bond yields really a concern for the market? Commodity prices keep surging, inflationary pressures are evident and the vast increase in money supply provides the ammunition. Average inflation targeting by the Fed provides the necessary context. PMIs last Friday pointed to higher inflation coming through. Substantial price increases for inputs such as PPE led to the fastest rise in “cost burdens” since October 2009, when the index started. Moreover, strong demand allowed firms to pass on the cost increase by raising selling prices. The rate of inflation in what firms charge customers was the second-fastest on record (behind only November 2020). In the UK, the composite PMI showed that “cost pressures intensified across the UK private sector during February”. Yields on government bonds continue to march higher. US 10-year Treasuries trade close to 1.4 per cent, a year high. The spread between 2s and 10s is at its widest in four years at 1.28 per cent, whilst the 5s30s spread is at a 7-year high at 1.57 per cent. UK gilt yields are at year highs above 70bps and 2s are at their highest since April, suggesting the market doesn’t think the Bank of England will go for negative rates.
Read The Editor John Hughman’s thoughts on inflation in this week’s editorial column and find out why Private Investor Diary writer John Rosier is sticking with the commodities theme in his portfolios.
If the Fed is worried about inflation and rising yields, this week’s round of speeches provides the ideal time to push back. I don’t expect they will – the Fed explicitly wants the economy to run as hot as it can to get employment back to 2019 levels. But that’s why inflation expectations can become unanchored. Powell delivers his semi-annual testimony to Congress this week, whilst Richard Clarida has two speeches on the economy and monetary policy. Lael Brainard and Michelle Bowman are also slated to speak this week. I think the Fed speakers will stress both the transience of inflation hikes and that policymakers are comfortable with above 2% prints (AIT implies this anyway). We know where policymakers sit on this. Treasury Sec Yellen last week said the price of doing too little is “much higher” than doing too much. Anchors are being slipped.
European markets sold off early on Monday, with the major bourses falling around 1 per cent. Inflation and yield concerns may be the driver but the move seems a little overcooked. Investors are starting to show their worry about yields – TINA is no more. The question is more of allocation and small caps vs large caps. Oil trades a couple of bucks off its recent year high, gold has made a decent fist of a rally off the key support at $1,763 to reclaim $1,790, whilst…