Brainard looks past next year’s inflation rise
October 22, 2020
–For a while, market zigzags were all about the imposition or removal of China trade sanctions. Now it’s all about stimulus, and Trump’s comment late yesterday that he didn’t think an agreement was going to happen caused selling pressure in stocks (which has somewhat abated as of this writing).
–Yesterday, the curve continued its steepening trend, with 2/10 up 1.2 bps to 66.4 (testing the year’s highs just above 68) and 5/30 up 1.2 as well, to 127.3. Brainard gave a speech yesterday and in one section said she monitors many indicators of inflation. Worth noting then, that the 10 year tip breakeven rose yesterday to 174.3, near the high set in the beginning of the year at 180. In late March I marked that spread as low as 50 bps, which brings up another comment from Brainard: “While inflation may temporarily rise to or above 2 percent on a 12-month basis next year when the March and April price readings fall out of the 12-month calculation, my baseline forecast for inflation over the medium term is for it to remain short of 2 percent over the next few years.” We almost certainly will have a surge in inflation early next year due to yoy comparisons. Of course, she also noted that the Fed, according to the new framework, will not hike until 2% is surpassed and appears sustained.
–One other comment by Brainard: “Interest-sensitive sectors such as residential real estate and autos have rebounded strongly—a welcome reminder of the power of monetary accommodation, especially when coupled with necessary fiscal support.” In other words, the Fed still has the power to bring consumption forward. But what if it’s not sustained? Or if fiscal handouts are reduced?
–Yields rose slightly at the long end, but vol was muted.
–The attached chart of solar energy ETF TAN shows an interesting decline of 8% yesterday. One BBG chat noted that perhaps it’s a signal that Biden’s lead isn’t as certain as polls indicate. Maybe a stretch, but there’s sure to be some energy market volatility in the aftermath of the election
