Inflation is the key topic in the market right now
Virtually
every financial market has been grappling with the specter of inflation in
recent months. This looming concern has drawn the focus of the US Federal
Reserve, among other central banks, prompting concerns in the short- medium-,
and long-term.
Many
of the largest world economies are presented with a unique issue. Re-opening or
returning to employment at the same time and quickly. This is particularly
problematic given a run on all matters of commodities and goods, causing a rise
in inflation.
These
worries have been on full display during the past several months, during which
Federal Reserve Chairman Jerome Powell has spoken at length on the issue. This
is hardly just a US issue however, with European
markets
experiencing similar concerns.
While
Powell has sought to calm markets and assure that inflation is within an
acceptable range, market investors are not quite sold.
This
is evident based on a number of recent selloffs and jitters roiling global
markets recently, including equity, metals, and commodities markets, among
others.
All
Eyes on Bond Yields
Bond
yields globally and have been on the rise in 2021, leading to some of the
largest single-day market pullbacks not seen since the previous year. Indeed,
abrupt rises in 10-year US bond yields in particular have been one of the most potent
drivers of markets
over the past two months.
A
rise in these yields is worrying investors that the Federal Reserve will have
no choice but to start hiking interest rates, now at historic lows.
Such
a move would be a massive blow for equity markets in the US. Other countries
are facing similar situations as well, with inflation widely floated as one of
the most concerning issues, other than Covid.
Additionally,
the Consumer Price Index in the US has also been rising, which measures the
average change over time in the prices paid by urban consumers for a market
basket of goods.
Analysts
had been forecasting a higher annual increase as of late, namely when weighed
vs. last April when global economies essentially were reduced to a standstill.
However, the latest CPI readings in the US during the past two months were well
above estimates.
This
recent reading in April in the US had an obvious and immediate effect on
long-term Treasury bonds. Rates for the 10-year Treasury note rose to 1.695%,
reversing off a recent decline.
Why
Rising Interest Rates Could Stop the Party
Investors
have been worried about rising interest rates for some time. Much of the recent
market strength in US indices has been attributed to rock bottom interest
rates, which has led to a groundswell of liquidity.
Long-term
Treasury yields are primarily driven by expectations about both inflation and
how the Fed may shift interest rates.
Should
bond yields creep up too high as a result of inflation, this would ultimately
force the Fed's hand in taking monetary policy action.
Recent
selloffs have recently incurred a roughly 2% or less decline in the S&P 500
and other major indices. However, these moves were predicated on fears of
rising yields. Any actual change or worse, surprise decision by the Fed to hike
rates would be a massive blow to investor confidence.
Perhaps
more so than any other lingering concern for markets, mounting inflationary
fears are the most troublesome. US equity markets have already been in
overdrive for 2021, with the only respites in advances seeming to be checked by
rising yields.
Even
assets that traditionally have been the beneficiaries of inflation such as
precious metals have been unable to escape the market carnage wrought by rising
yields.
Both
gold and silver have consistently declined with
rising yields. This is due to the prospect of rising interest rates and a
higher US dollar, a net negative for metals.
Nearly all investors
should be cognizant of any changes in bond yields moving forward, which will
inform any decision-making by the Fed. For now, analysts are hoping for
normalized inflationary readings and nothing too groundbreaking as to force the
