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Entering The Mid-Cycle Phase
Week Ending June 25th, 2021
I think it is evident from the market action this week that the Fed's minor change in policy stance last week was on the dovish side of the hawkish spectrum. It appears as if majority of the market participants agree that inflation is transitory this time. Though it is strange that nobody seems to understand the undefined word "transitory" in financial terms. Moreover many believe that the economy projected to grow at 7% in 2021, can withstand 3% core inflation.
I think we have passed the early cycle of the recovery and entering the midcycle phase which is typically the longest phase of the business cycle. I do think the markets will keep on experiencing periodic pullbacks as most of the good news has already been digested and inflation remains the major threat to the future expansion.
Let's suppose Fed proves to be right about inflation and the inflation remains contained within the undefined parameters of the word 'transitory". We still have a lot of things to consider in terms of what may go wrong in the next 1-2 years. Fed is projecting only 2 rate-hikes in 2023 and I think these next 2 years will consume major chunk of the mid-cycle phase. What tools will we have at that future moment in case mid cycle expires early. This mid-cycle phase is not similar to historical mid-cycles as we are recovering from unprecedented shock never seen in last 100 years. I think we will come back to zero interest rates if not negative rates and fiscal stimulus plans again with some elevated levels of inflation if Fed remains complacent and stick to "maximum" employment target and newly "refined" inflation target.
Over all things look great in general as corporate credit spreads have declined to historic lows, no stress in the banking system, Fed remains ultra-dovish, more fiscal packages in terms of infrastructure plans, supply chain pressures have eased a little for now etc. etc. So I think one should remain invested in the market, although pullbacks are unavoidable and should not be the reason to stay on sidelines. But one should be vigilant all the time about future subtle changes in fed's stance and inflation.
The 10 year US treasury yield jumped back above 1.5% on Friday following the report that core PCE had risen 0.5% in May bringing the year on year increase to 3.4%.
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By Jaspreet Singh PaddaWeek Ending June 25th, 2021
I think it is evident from the market action this week that the Fed's minor change in policy stance last week was on the dovish side of the hawkish spectrum. It appears as if majority of the market participants agree that inflation is transitory this time. Though it is strange that nobody seems to understand the undefined word "transitory" in financial terms. Moreover many believe that the economy projected to grow at 7% in 2021, can withstand 3% core inflation.
I think we have passed the early cycle of the recovery and entering the midcycle phase which is typically the longest phase of the business cycle. I do think the markets will keep on experiencing periodic pullbacks as most of the good news has already been digested and inflation remains the major threat to the future expansion.
Let's suppose Fed proves to be right about inflation and the inflation remains contained within the undefined parameters of the word 'transitory". We still have a lot of things to consider in terms of what may go wrong in the next 1-2 years. Fed is projecting only 2 rate-hikes in 2023 and I think these next 2 years will consume major chunk of the mid-cycle phase. What tools will we have at that future moment in case mid cycle expires early. This mid-cycle phase is not similar to historical mid-cycles as we are recovering from unprecedented shock never seen in last 100 years. I think we will come back to zero interest rates if not negative rates and fiscal stimulus plans again with some elevated levels of inflation if Fed remains complacent and stick to "maximum" employment target and newly "refined" inflation target.
Over all things look great in general as corporate credit spreads have declined to historic lows, no stress in the banking system, Fed remains ultra-dovish, more fiscal packages in terms of infrastructure plans, supply chain pressures have eased a little for now etc. etc. So I think one should remain invested in the market, although pullbacks are unavoidable and should not be the reason to stay on sidelines. But one should be vigilant all the time about future subtle changes in fed's stance and inflation.
The 10 year US treasury yield jumped back above 1.5% on Friday following the report that core PCE had risen 0.5% in May bringing the year on year increase to 3.4%.