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As the economy accelerates until 2021, investors may have to contend with some unexpected inflationary pressures, even if only for a while.
Bond market traders and Wall Street experts have been pointing to rising inflation from its current latent levels.
In fact, many see inflation rising and perhaps slightly above the Federal Reserve’s 2% target rate that has been elusive for much of the past decade. The main engine is an economic reopening driven by the vaccination of more Americans, which will cause upward pressure on industry prices that were held back during the coronavirus pandemic.
The trick, though, will be to keep him there.
The Fed sees inflation as good for the economy, as it signals growth and allows the central bank to act the next time a crisis arises and demand help from monetary policy. However, several factors have conspired to keep inflation low and will likely help contain an increase in the coming months.
“We expect interest rates to remain lower for longer and we expect inflation to remain contained,” said Sunitha Thomas, Northern Trust Wealth Management’s national portfolio advisor. “We believe there will be some volatile impressions about inflation, and the market will react and try to decipher what that means. We believe this is more cyclical than permanent.”
At the Fed meeting earlier this month, President Jerome Powell acknowledged that the economy could see some price pressures, perhaps due to rising energy.
However, policymakers should see a sustained level before taking any action, a stance now codified by the Fed’s flexible average inflation approach it adopted a few months ago.
“It won’t be easy for inflation to go up. … It will be a while,” Powell said during the post-meeting press conference. “What we’re saying is that we will keep the policy very accommodating until expansion goes well. And we won’t prevent rates until we see inflation reach 2% and be on track to exceed 2. It’s a very strong commitment. and we think it’s the right place to be. “
The issue of rising inflation and the Fed’s expected policy response are crucial as the market enters the next phase of a strong recovery that began from pandemic-induced lows in late March.
Investors are increasingly wondering if the market is entering a bubble phase similar to the collapse of the point as in 2000, which was exacerbated by rising interest rates trying to keep pace with growth.
“As we explore the market commentary landscape through 2021,“ the return of inflation, perhaps with revenge, ”is a very, very common issue,” Nick Colas, co-founder of DataTrek Research, said in a note this week. .
Colas noted that 5- and 10-year imbalance rates, or the difference between government bond yields and treasury inflation-protected securities, are only a shadow below 2%. This represents two-year highs and is a measure of where the consumer price index is heading the market.
Such an environment, Colas noted, is not generally good for inflation-sensitive stocks, such as bonds with a longer date, unless market enthusiasm for the 2021 global economic recovery is believed. it is deeply out of place.
Expect a strong rebound
Goldman Sachs, for example, is leading the group when it comes to hopes for the economy next year.
The firm’s economic team sees full-year GDP growth of 5.9%, about 2 percentage points ahead of agreed-upon estimates. Along with this growth projection, it is stated that core inflation as measured by the Fed’s preferred criterion, the personal consumption expenditure deflator, “will bounce briefly above 2% next spring as we overcome the core effects of the weakest pandemic, “Goldman economists Alec Phillips and David say. Mericle said in a note.
“Several categories should reject the direct and indirect disinflationary effects of the pandemic, including air fares, hotels, clothing and financial services,” they added. “But the pandemic has also had temporary inflationary effects in categories such as used vehicles and medical services, and the impact of a weaker economy on shelters and other basic categories of basic services sensitive to lack of freedom “.
Goldman’s team said that only a “tight labor market” would trigger a sustainable inflation boost that would lead the Fed to raise rates, and that it is unlikely soon.
Similarly, Citigroup economists expect inflation to rise above 2% in April and remain there for a few months, but to “recover towards the 2% target by the end of the year “. The company sees the rapid jumps in travel and clothing prices offset by easing the costs of medical services and used cars.
These expectations for an environment of controlled inflation are helping to fuel a strong enough outlook on Wall Street for another year of strong returns.
“All of this has led us to have positive expectations around the reopening of the economy and to have more confidence in profit expectations next year. We expect the Fed to remain very accommodative and interest rates to remain. lower for longer, ”said Thomas, an American. Trusted Advisor. “We are waiting for 2021.”