While US Fed members are divided over the temporality of inflation, the rise in global bond yields reflects the growing assessment that inflation is not temporary and urges action on the part of the central bank, while on the other hand there is concern about monetary action leading to undesirable results.
According to the optimistic scenario, US inflation will rise, but will be based to some extent when the US Federal Reserve does not foresee a situation of loss of control over price levels. Raised sharply in the face of the rise in the probability of US interest rate hikes and a reduction in the Fed’s bond purchase program in the coming months.
“Not much meat for rising US bond yields”
While investors’ concerns about the consequences of the corona were replaced by fears of inflation, in the stock market the S&P 500 index marked a correction of about 5% from the peak. According to Nadav Ofir, a global markets strategist at Bank Hapoalim’s Chamber of Commerce, “the bond alternative has become fully existing in general to a little more existing. Once the alternative may be overcome it may have an impact on the stock component. The market is at a crossroads. On the one hand there is the transient (temporary) inflation which is estimated to pass, and on the other hand also the inflation will be based around 3% later on, this may indicate that the temporary becomes fixed. And this is the story that leads the returns.
Nadav Ofir / Photo: Aviv Gottlieb
“Supply chain difficulties are causing a supply problem which in turn is leading to a rise in prices, and this is reflected in the yield on short.term US bonds,” Ofir noted. “B, for example, will only come at the end of the year, so there are a lot of factors here that could change the way, and yet the way is for a 2% yield on 10.year bonds in the US, and we even see places where the yield will be higher.”
On the way to stagflation in the US? There is a possibility
According to him, this move will not cloud the markets but will certainly cool them down a bit. “Yields and inflation expectations will stabilize. With a yield of 2% for 10 years, the alternative does exist, but it is not attractive enough for investors to return to the stock market. In my opinion, this scenario will happen in the next quarter. Yields will rise We see money entering the stock market, quite similar to what happened in 2018. “
In the run.up to the release of US inflation data this weekend, the question of the temporality of inflation is sharpening, while commodity prices are climbing to a decade high. Against the backdrop of lowering forecasts for the US economy by Goldman Sachs Investment Bank, the September retail sales data to be released this week may in turn provide an indication of the possibility of stagnation. That is, a recession combined with inflation.
According to Amir Kahanovich, Chief Economist of Excellence: “A combination of inflation data and retail sales data, in parallel with the opening of the reporting season for the third quarter, has been burdening the stock market for two months, with fears of further price increases. The third, but mainly about the risk of earnings forecast updates ahead of the fourth quarter. Mainly through an increase in short.term yields, “Kahanovich noted.