Markets
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.
(New York)
The debt clock is reading ten minutes to midnight for Congress which seems gridlocked in a game of chicken that could cost the public. Goldman Sachs issued an internal note late last week that there is a material risk that congress fails to reach a consensus on increasing the debt limit. Mitch McConnell is currently reviewing two plans to present Dems that would allow them to reach a consensus on raising the debt ceiling. Treasury Secretary Yellen reiterated that the government will be cash poor to pay the bills if Congress fails to raise the ceiling. Some are calling for the Treasury to mint a $1 trillion coin in order to finance if Congress doesn’t raise the debt ceiling but Goldman says this scenario is unlikely.
FINSUM: Congress always comes around to raise the debt ceiling, but a new wave of Democrats and Republicans pose new risks that a mutual agreement can be met.