Displaying items by tag: inflation

(Washington)

Few would argue that the tax cut passed in late 2017 was one of the main drivers of the strong economy we saw this year. Corporate earnings have been stellar, the economy is expanding at a good clip, and the labor market is tight. However, the IRS looks about to undermine the benefit of the tax cuts. The agency just announced a new policy for 2019 regarding how it accounts for inflation. The move will undermine much of the value of the tax cuts by raising tax bills for almost all Americans. The new policy will increase tax revenue for the government by $133.5 bn over the next decade.

FINSUM: This is the kind of policy that is going to hurt more over time. That said, the current deficit is huge, so from a fiscal responsibility view it is hard to argue this is unnecessary.

(Washington)

Investors can breathe a sigh of relief, but only for a moment, as it looks unlikely that the Fed will hike again in its next meeting this week. The Fed will not be releasing updated projections after this meeting. That said, improvements in the labor market recently make it likely that the central bank will hike rates at its meeting next month. The Fed is supposed to discuss this week all the things you might expect: “the economy, financial markets, and the future path of rates”, according to the WSJ. Fed chairman Powell will not be holding a press conference after the meeting.

FINSUM: This Fed is so hawkish and the economy is rolling so well that even a month’s break from hikes seems like a reprieve. We are a long way from 2013.

(New York)

Inflation has been ticking higher, but it has not been high enough to cause real concerns. Despite this, the Fed has still been very hawkish, hiking rates several times. Well, that mild inflation may be about to change. Anecdotal evidence of corporate behavior shows that companies are increasingly passing along costs to consumers. In everything from soda to bleach to cookies, companies have been raising prices. Explaining the moves, the CEO of Mondelez says “The consumer environment is strong”. Prices across the supply chain have been rising, helping to drive higher pricing.

FINSUM: Consumer sentiment and spending is strong and this seems like the ideal environment in which to raise prices. Thus we think headline inflation is going to start to rise.

(New York)

Investors have gotten so used to low inflation that it is sometimes hard to imagine seeing it rise. However, Morgan Stanley is warning that inflation is rising across the globe and investors need to keep an eye on it. In Europe, Asia, and the US, inflation has risen from 1.1% to 1.4%, and it is bound to move higher, according to Morgan Stanley’s chief global economist. Interestingly, MS argues that the Euro area and Japan will see a higher rise in inflation than the US.

FINSUM: If inflation rises more strongly in other developed markets than the US, will that lead to even more foreign buying of US bonds because yields in those locations are so much lower? In other words, will there be even more demand for US bonds?

(New York)

Gold has been in the doldrums for a long time (and we mean long). The shiny metal is still down over 35% from its peak in 2011, and it has lost 8% this year. However, Barron’s is arguing that it is time for gold to shine. They argue that since gold is currently very cheap relative to other asset classes and inflation is increasing, the metal is poised to make a comeback. Gold has historically been a good hedge against inflation, which may drive its renewed appeal as inflation rises. The metal is currently trading around $1,200 per ounce.

FINSUM: The problem with this argument is that gold also tends to weaken as rates rise (because it has zero yield). So, how much will that offset any gains?