Volatility storm gives way to inflation gale By Reuters


© Reuters. FILE PHOTO: A New York Stock Exchange trader works as markets continue to react to coronavirus disease (COVID-19) inside the New York Stock Exchange in New York

By Mike Dolan LONDON (Reuters) – Long-lasting or not, investors are bracing for several months of inflationary distress that challenge the global market positioning structure far more than January’s amateur stock market frenzy. Amid hopes that the worst of this latest pandemic wave has passed with the launch of vaccines, market-based inflation expectations are rising again. Some indexed bond and swap market indicators reached their highest level in more than two years in the United States this week and in more than 12 months in the euro zone. Regardless of the central bank’s promises of easy money ahead, the cost of long-term borrowing follows suit. 30-year U.S. and German government bond yields reached their highest level since the pandemic, with the latter turning positive on Thursday for the first time since March and yield curves steepened to their highest level. high in almost four years. What is certain is a backward jump in headline inflation rates, much like the rally to nearly 1% in the euro zone in January after five months of falling prices, is now largely unavoidable everywhere. parts. The annual base effects of last year’s sales tax cuts and 12-month price comparisons against last spring’s pandemic-driven energy, food and commodity price declines will ensure several months of Sparkling headlines ahead. United Nations data shows that annual food price inflation was above 10% last month, mainly thanks to rising cereal prices, and the index it compiles was at its highest since 2016. At just under $ 60 per barrel, world prices were positive again year after year. -year in February. If they just stay here for the next three months, the collapse of just $ 15 through March and April of last year will start to feed a dizzying annual energy price pulse to inflation figures. Additionally, COVID-related disruption to supply lines has also boosted shipping and transportation costs, with the RWI / ISL container performance index hitting record highs late last year, with annual increases of over 5% for the first time since 2018. that is only temporary around a restart of the world economy or if it takes hold on long-term inflation assumptions is the central issue, as with all inflation peaks. Lawmakers and central banks seem relaxed and prepared to see through it, even if neither the US Federal Reserve nor the European Central Bank has specific yield caps to calm anxious bond markets in the meantime. Chicago Federal Reserve chief Charles Evans said Wednesday that he saw a rebound in spring inflation as temporary and that headline rates would return to between 1.5% and 1.75% by the end of the year. Meanwhile, even 2.5-3.0% would not be a problem, he said, as the Fed is now targeting an average rate of 2% over time. Last week’s Congressional Budget Office long-term forecasts were also serene, showing US core inflation below 2% through 2024 and averaging just 2.1% from then through 2031. NUMBER MAGIC So shouldn’t these short-term mechanical effects be embedded in market price by now? After all, many investors appear to be convinced that this year’s inflation slump will subside, as economists doubt proportional wage increases will occur, given that unemployment rates remain high and even assuming possible increases in the minimum wage. And yet the official incoming figures do not play with the forecasts and Citi’s global inflation surprise index turned positive in January for the first time since December 2018. And if there are inflationary surprises in store for the next six months, the risk Erratic market trading alone can make investors nervous. . At least for multi-asset investors, the sustainability of super-low long-term borrowing rates has been the central force driving the sky-high valuations now enjoyed by equity indices across the board. And even marginal moves in nominal bond yields from here could trigger a massive correction. Pascal Blanque, chief investment officer at Amundi, Europe’s largest asset manager, said this week that 10-year Treasury yields were less than 20 basis points for forcing that rethinking. “If 10-year yields rise further, equity market performance will be challenged. In our opinion, a 1.3% level for the 10-year UST would test the market,” he said, adding that he didn’t see this soon. but underlined the need for some coverage. Others, like Pinebridge’s director of multiple assets, Mike Kelly, think that the stock trigger may be much higher and closer to 2%. But Kelly wonders why the Fed would even contemplate that. “If you advocate for the tax authorities to spend more, why then would you let the yield curve eliminate the benefit?” he said. In the absence of obvious yield caps, uncertainty will build around how high bond borrowing rates might rise during this inflationary storm before knocking down interest rate-sensitive or ‘duration’ positioning in equities, raw materials and currencies. For Bank of America (NYSE 🙂 strategists, the “magic number” comes down to relative income for many investors. Its year-end forecast of 1.75% for 10-year Treasury yields puts it above the dividend yield of more than half of the stocks, compared with 70% of the yields of the stocks. stocks that outperform bonds today. While other metrics on past tipping points put a much higher tipping point, the picture has changed since the last drop in 2008, the BofA team added, and since then the average recommended stock allocations have been only from 50% with Treasury bonds above 1.5%. (by Mike Dolan, Twitter: @reutersMikeD. Additional reporting by Sujata Rao; editing by Susan Fenton)