Cyclical Inflation; Real Growth Surges

February 22, 2021

Market Update: U.S. economic figures surge with real growth. Inflation is cyclical. The S&P 500 futures are pointing 0.7% lower after the index fell a similar amount last week on concern about higher interest rates with almost all TV “pundits” discussing inflation concerns. After jumping 13 bps last week, the 10-year Treasury yield is up another 3 bps to a one-year high of 1.37%.

Inflation cyclical, and growth risingcyclical inflation

Cyclical inflation should be peaking, and “real-growth rates” should be troughing and pivoting upward. We have updated our 10-Year Treasury yield, 10-Year Inflation Breakeven, and 10-Year “Real Growth” charts. These are available for clients on the client portal. Cyclical inflation is peaking. But real growth is accelerating upward, which is a good thing.

The Covid virus spreading in China began to shake equity markets almost 12 months ago. They had hit all-time-highs. Over the subsequent weeks, a string of new cases emerged in Korea, Iran, Italy and, eventually, North America. Subsequently, global financial markets experienced a recessionary decline of 30%+ over a five-week period.

While much has changed since then, in most respects, very little has changed on balance. A big rise in government bond yields this week lifted 10-year Treasuries all the way back to levels last seen in late February 2020. Financial markets — except long-term Treasuries traders — are welcoming steeper yield curves. Our southern, Texas and Oklahoma freeze helped oil prices back above $60 for the first time in over a year. Even with a mid-week stumble, global equities touched a new high and are up 15% y/y (MSCI World Index).

Strong economy

How strong is the overall economy? U.S. examples from January just last week included a surge in retail sales, up 7.4% year on year, manufacturing output rising within 1% of pre-pandemic levels, and housing starts exactly in line with year-ago levels. The $600 checks/handouts to individuals juiced a big snap-back in retail sales. There could be more of those coming.

The TV financial forecasters out in mass in Q4 2020 calling for a double-dip recession in Q4 2020–Q1 2021, have now retreated and most are out revising their 2021 U.S. GDP growth forecasts upward to 5%–8%.

The key factors behind the revision are: 1) the prospects larger-than-expected fiscal support and, 2) signs that the U.S. economy was much more resilient than they expected at the start of the year. A 6% growth rate would be the strongest annual gain in the USA since 1984 (albeit following the deepest annual decline -3.5% in the post-war period). For more on this story: Stocks making the biggest moves midday: Palantir, Applied Materials, Deere & more

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