Some investors are becoming increasingly aware of inflation, with prices rising for both producers and consumers. The US Federal Reserve, however, has been telling markets it thinks this inflation is transitory. The Fed now arguably determines the path of 10-year government bond yields (which have fallen to 1.3%) and is effectively imposing itself on the market. As arguably the Fed is controlling the show, what it thinks about inflation could be more important than what markets think.
As for earnings, we have witnessed a strong start to the year and could be in for strong Q2 results. Announcements so far have been good with strong results from central banks earlier. What could this mean for interest rates in real terms? Some argue they’ll become increasingly negative for two reasons:
Continuing supply bottlenecks will keep squeezing prices higher, and;
The Fed is sticking to its script over inflation and following the 2% averaging theme as opposed to the ceiling theme. It does not mean the Fed is right, but markets have to dance to its tune and work around new parameters regardless of whether they think the Fed is right. Meanwhile, the Fed continues to supress bond yields. Hence, nominal yields minus inflation = higher negative real rates.
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The Week That Was…
Exports to the EU from the UK in May reached their highest levels since October 2019 suggesting the perceived impediments to business, due to increased bureaucracy, are fading. Meanwhile, a Deloitte’s survey* found CFOs planning to increase investment and hiring at the fastest pace in almost seven years as well as being most aggressive about acquisitions in 11 years.
In Europe, June saw a surge in new car sales, (up 13.3% y/y) whilst in the US, retail sales gained 0.6% m/m**, well ahead of expectations. Core retail sales rose 1.3% m/m; spending is rotating back to services such as travel and entertainment.