Markets lost a small bit of ground as participants evaluated the risks of further lock-downs in the US. Daily new US COVID-19 infections hit a new high this week – topping 140,000. Infections are estimated to move higher from here as the US head into winter… as families move indoors over the festive holiday season. Therefore, what does “200,000+” new daily infections mean for the re-opening?
Rate are going higher and the long-term lows are in. That’s my thinking.
Why are they going higher? Three reasons come to mind: (1) massive fiscal deficits via further stimulus measures; (2) potential COVID-19 vaccine; and/or (3) an improving economy (as a result of the above) Each of these are possible enablers of higher rates…
Earlier this week I talked to the possibility of higher inflation over the next 1-2 years on the back of a (likely) stimulus deal.
In short, we might be facing the prospect of excess cash chasing too few goods….
There are two things which cause for yields (and interest rates) to rise:
An improving economy; e.g., where investors feel more confident to rotate out of ultra-safe assets (bonds) into riskier assets like stocks (at a higher yield); and/or
Probabilities of higher inflation; e.g., where the Fed could hike rates to cool things down
To be clear – today the bond market sees little chance of either in the near-term
For anyone who thinks the real economy is in ‘good’ shape… then you are at odds with the Federal Reserve.
The world’s largest central bank told us today that interest rates are to stay at zero in nominal terms (negative in real terms) at least through 2023.
My guess what at least through 2022…. not 2023.
When the Fed declared their intent to purchase corporate debt ETFs at the height of the crisis- some considered it a step too far. Today they declared this still wasn’t enough…
There’s something wrong with this equation…
Over the past six weeks – more than 30M Americans have lost their jobs. Furthermore GDP for Q1 shrunk by almost 5% and is expected to contract between 30% and 40% for Q2.
And despite the worst economic numbers (and forecasts) we’ve seen in nearly a century – the stock market just posted its best monthly gain since 1987.
Over the past few weeks – we’ve seen sheer panic in markets. As a result, the US Government and Central Bank have offered up to $6 Trillion in emergency funds to limit the impact to business and families… will it help?
