Bonds: Total Market
According to a poll of leading bond strategists surveyed by Reuters, there is likely to be a correction in…see the full story on our partner Magnifi’s site.
Another jobs report hit the tape today, and another good reading, with job growth outpacing expectations. Crucially, there were also no signs of heavy wage growth that could stoke the market’s inflation fears. According, Treasury yields fell across the board, with the short end of the curve falling the most. Analysts feel that the report did not bring the dreaded Fed Taper any closer, which led to the fall in yields. Fed minutes will be released next week and that is the next time the market will get a peek into what the central bank may do next.
FINSUM: Two divergent paths here—either the market is falling into complacency, or the Fed’s view that inflation is “transitory” is starting to come true. It might only take an errant sentence form the Fed to spark a big correction.
According to a poll of leading bond strategists surveyed by Reuters, there is likely to be a correction in bond markets in the next three months. The reason why is that central banks across the world are all looking for the exits from their stimulus programs. The head of strategy at Rabobank commented that “The message from Powell is: We will look through it (inflation). We're not going to jump to conclusions and that creates some calm. But you just need a couple of big surprises (in data) and things are again open to correction”. 59% of those strategists surveyed said they saw a “significant” sell-off in global bond markets coming in the next three months.
FINSUM: This all depends on timing and signaling. If the Fed makes an inadvertently hawkish statement, you could easily see a 2013-style Taper Tantrum. But if the Fed uses careful wording and guidance, the whole transition could be smooth.
The market has been nervous for months about growing inflation in the US. The Fed has tried to appear sanguine about it, and has so far done a decent job of keeping fears in check. However, a blowout inflation report this month, as well as more hawkish comments this week, means that anxiety is rising strongly again. And according to Jeffrey Gundlach, the fears are justified as he believes inflation will not be “transitory” as central bankers have been predicting. One of his core arguments is that inflation may become a self-fulfilling prophecy, where consumers start stocking up on items now to avoid future price rises, which in turn causes shortages and drives prices higher.
FINSUM: The self-fulfilling prophecy is a good near-term argument, but we have a longer-term one: demographics. The largest generation in the history of the US—Millennials—are coming into their peak earning and buying years, which is creating demand for literally everything, and supply is tight across almost all industries. Inflation looks inevitable.