Bonds: Total Market
Headline inflation, which includes food and energy prices, rose at a staggering 4.4% annual growth at the end of September, which is the highest number posted since 1991. This isn’t necessarily the Fed’s preferred inflation metric because food and energy prices are more volatile than other areas, but even excluding those categories core inflation was at 3.1%. On top of that, personal income is down almost 1%, which makes that inflation gain even more painful. Policy makers are worried about overall economic health as stagflation becomes a real possibility with GDP coming in at just 2%, the weakest quarter since the recovery started. Treasury Secretary Yellen says that yearly inflation will remain high but she expects monthly inflation to come down as the year closes, with headline figures coming down towards the target of 2%. On the positive side, wages and salaries kept up this month, hitting 4.6% but that still poses challenges for the labor market in its own way.
FINSUM: Inflation is still posting strong gains but keep your eyes on the monthly annualized numbers to gauge if what Yellen says is accurate.
Inflation has been a point of contention as of late, as central banks are signaling it’s driven by the supply side constraints, and others are believing this is driven by the central bank practices themselves. Goldman Sachs chimed in saying they see 2021Q4 inflation number at 4.3% but that trailing off to 2.15% by 2022. The higher inflation in the intermediate means that the economy is at a significant risk of a right hike in early 2022. Sachs places themselves on the supply side of the debate however as semiconductor manufacturing picking up and increased imports in furniture and other consumer goods will drive down prices. On the opposite end of the spectrum, Jack Dorsey took to his own platform twitter to warn of hyper-inflation which sparked its fair share of social media controversy.
FINSUM: Inflation expectations are running pretty high historically, but surveys are really a poor metric, the TIPS market for example is predicting much more stable inflation.
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The fixed income market is in some of the worst shapes in recent memory. Both government and corporate debt have lost a 15 year high of 4.4% this year. Regardless if inflation is being driven by central banks and trillion-dollar stimulus or the supply chain disruptions Powell is claiming the bottom line is inflation is eating at the ‘fixed income’ bond investors have relied on. The U.K., Euro area, and Japan haven’t exactly been a shelter dropping 7.5%, 8%, and 9.8% respectively. On top of all of this, the Fed and other central banks are tightening, eroding the value of existing bonds. There has been shelter if investors are willing to look to emerging markets, such as China but overall investors need to be more flexible and can’t rely on index bond investing to survive.
FINSUM: High-yield corporate debt is where investors are going to have to look domestically to get the return after inflation they are used to.