“The market says ‘everything is fine’.
Record levels of fiscal stimulus, an increase in the household savings rate, persistent supply constraints and high asset prices pushed inflation expectations to their highest level in nearly seven years at mid-point. may.
But expectations have since fallen to a tremor, amid a belief that central banks would begin to reduce their emergency monetary policy parameters, putting the brakes on inflationary pressures.
The US 10-year breakeven fell to 2.29% on Friday, from a high of 2.56% just a month ago. Australia’s 10-year break-even rate fell to 2.1%, down from the peak of 2.37% reached in mid-May.
“The balance points have completely collapsed,” said Charlie Jamieson, chief investment officer of Jamieson Coote Bonds.
“Looking at long US Treasury bonds, I think we can easily see that the market is voting on transient inflation – however long that transition is. It’s not a few months, but neither is it years.
Fed officials revised their forecasts for inflation and economic growth on Wednesday, admitting that inflation had exceeded expectations in recent months.
The improvement came after the US consumer price index beat economists’ forecasts for a second consecutive month in May.
[Central banks] might think they can tame inflation, but once the inflation genie is out of the bottle it’s hard to put it back in place.
– Stephen Miller, GSFM
Mr Miller of the GFSM said: “Not only did the Fed not detect this spike in inflation, it was not able to predict it, and the markets missed it as well. They had huge hiccups on these CPI impressions in April and May. “
Jamieson Coote Bonds published a study in April claiming that persistent inflation would only be achieved through full employment and wage growth, barring a war or an energy shock.
The reaction of the stock markets this week also suggested that investors were betting that inflation would not get out of hand.
Energy and Materials were the worst performing sectors in the local equity market, being stocks normally well positioned to benefit from an inflationary environment.
But BlackRock chief executive Larry Fink said earlier this month that he believed many market players were underestimating the effect of inflation.
“Most people haven’t had a career of more than 40 years, and they’ve only seen inflation go down in the last 30+ years,” he said. “So this is going to be a pretty big shock. “
Mr Miller said he was concerned that markets and central banks would remain complacent about inflation risks. “Central banks say they know how to control inflation, but be careful what you want,” he said.
“They might think they can get inflation under control, but once the inflation genie is out of the bottle, it’s hard to put it back in place.
“They haven’t been tested yet, and when they were last tested they weren’t great.”