The market was in a frenzy over the latest CPI report which had the highest rise in inflation…see the full story on our partner Magnifi’s site
May 12th was one of the key market moments of 2021. All eyes were on new inflation data that would make or break the market. The result was a definitive “break”. Inflation came in hot, with the reading measuring 4.2%, well over already high expectations of 3.6%. Markets took a pounding, with the Nasdaq leading the day’s losses in a 2.7% fall. The Dow and the S&P 500 also fell sharply.
FINSUM: We are now in the middle of another market tantrum. It is critical to ask oneself why inflation is so troubling. The reason the market is losing is because of higher rates’ effect on tech stock valuations, but even more importantly, the timeline for the Fed’s taper. But if you can put that aside, what is actually happening is that economy is doing well, and earnings look likely to be great. We think investors should just ride out the storm.
Yellen, former chairmen of the Federal Reserve, was confirmed by the Senate in her nomination for secretary of the treasury. The 84-15 vote reflects both Republicans willingness to work with the Biden administration on economic issues, and Democrats desire to brand their own economic reactions to the covid crisis. Yellen, previously at Brookings Institution, has a decorated history in public service working for Clinton administrations council of economic advisors, CEO of San Francisco regional federal reserve bank, and chair of the Federal reserve. Yellen faces many challenges in her role as treasurer both with the current state of the economy and the looming U.S. debt. Yellen plans to work closely with current Federal Reserve Chairman Jerome Powell to address the U.S. economy.
FINSUM: Yellen historically is known for reading the economy through the lens of the labor market, so expect her policy guidance to be especially informed through a variety of labor market indicators. Additionally expect Yellen’s policy to be more expansionary than a previous administration, but she is weary of the U.S. current debt and has denounced the large deficits supported by Modern Monetary Theory.
Investors need to keep a very sharp eye on the bond market. The yield curve is steepening without any associated rise in economic activity. The reason why has to do with the election. Biden has been rising in the polls, and investors have been increasingly betting he will emerge victorious as part of a blue sweep. If that happens, it is assumed the US would issue a great deal more debt to fund stimulus packages. This means there would be significantly more Treasury bond supply than at present, and potentially calls into question the credit of the US government. As evidence of this trend, the spread between 5- and 30-year Treasuries just hit its largest since 2016.
FINSUM: This is a potential black swan event that no one has seen coming. The election seemed like it would be a dead heat through election day, but if the needle moves more towards Biden, the whole picture for fixed income will change.
The bond market is usually ahead of the stock market in predicting and reacting to the economy. It seems to be doing so again. While stocks have had a huge run higher, bond yields have largely been stuck at very low levels. The ultra-low yields of around 0.7% on the ten-year Treasury mean that bond investors see a long, hard, recovery looming and many years of continued aggressive monetary stimulus by the Fed.
FINSUM: Stocks seemed to have gotten a dose of realism over the last two weeks, but yields may be more reflective of the difficulty of the recovery to come.