The recent unexpected hike in treasury yields has many investors worried about the future of their investments in all asset classes.
As the 10-year and 30-year treasuries hit 1.60% & 2.29%, respectively, investors are concerned whether these changes are due to inflation expectations under the assumption that rapid economic recovery is imminent in the near future – even though all the leading economic recovery indices are still skeptical. In addition, Federal Reserve chair Jerome Powell also showed his skepticism in the recent senate hearing about the inflation expectations, saying, “We could have a surge in spending as the economy reopens. We don’t expect that to be a persistent longer-term force, so while you could see prices move up that’s a different thing from persistent high inflation, which we do not expect.”
In this article, we will take a closer look at the recent surge in treasury yields and how the Fed is likely to mitigate inflation fears.
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Understanding the Indicators Related to the Economic Recovery
Before we talk about economic expansion and how it can lead to an inflationary environment, we need to understand the economic indicators that measure the economic recovery and its expansion. The first and most important factor in economic recovery is unemployment figures.
The Gradual Decline in Unemployment Claims
Due to the wide vaccine roll-out and declining COVID-19 classes, many states are easing their COVID-19 related restrictions on business and it’s showing some positive signs of people coming back to work.
However, it’s nowhere close to a point that will lead economists to believe that inflation sentiment is justified. Recent data published by the Department of Labor indicated that Americans seeking unemployment fell by 111,000 from prior week to a seasonally adjusted 730,000. Although this is great news when looking at an economic recovery, these numbers are still very high. Furthermore, as the economy emerges from the COVID-19 lag, the majority of the employment sectors are heavily reliant on the dissemination and administration of the COVID-19 vaccine; as more and more people are vaccinated, it will definitely improve the unemployment outlook for Americans.
The Next Stimulus Talks
The Biden administration is seeking to push their next stimulus through the Senate, as it recently got through the House of Representatives. The additional unemployment benefits and $1,400 checks for eligible Americans will add to consumer spending as seen in the past months and will ultimately add to the GDP.
Furthermore, the additional funding for local and state governments will alleviate the liquidity strains caused by the decrease in their usual revenue sources. The federal government’s intervention in these times goes to show that inflation concerns are not on their radar.
Consumer Confidence is Still Grim
As many know, American economy is a consumer driven economy and consumer spending plays the largest part in the national GDP calculations. In the recent surveys done by University of Michigan Consumer Sentiment and Conference Board, one of the leading surveyors, indicate the following:
- Consumer confidence in purchasing an automobile is at its lowest since 2008
- Consumer confidence in buying large household appliances is at its lowest since 2011
- New home-buying is also relatively low. This is primarily due to a lack of inventory in the major housing markets; as more and more sellers are staying put due to COVID-19, more and more adults are moving in with their elderly parents, and rental markets are struggling due to work-from-home directives
Is Inflation a Near-Term Concern?
The simple answer is likely no; however, it’s undeniable that the American economy is in a better shape than it was a year ago. But we have some time to go before we start to see growth in the economy and real signs of inflation. As mentioned above, inflation is a process that typically follows economic expansion, consumer spending and sentiment, when demand for goods starts to exceed supply, and all the aforementioned indicators start to show positive trends in the upward direction.
It’s also important to note that the Federal Open Market Committee will likely stick with their earlier plans to keep interest rates historically low, as Fed Chair Jerome Powell isn’t seeing inflation as a concern in his outlook of the American economy, and hold rates near zero until the economy has weathered the effects of the coronavirus.
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The Bottom Line
The recent hike in treasury yields and its adverse impact on the equity markets is more than just inflation expectations; some economists believe that it’s more related to the availability and issuance of debt to fund the next stimulus package that’s making its way through Congress. It’s crucial for investors to pay close attention to the leading economic indicators for an economic recovery for their inflation concerns.
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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. Information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.