Tue. Oct 19th, 2021

For now, the U.S. government bond market appears to be in line with the Federal Reserve’s view that inflation will remain largely under control, even after a few months of spectacular readings. Beneath the relatively bloody surface, however, is a secondary stream of concern.

The concern is that the ten-year Treasury will give TMUBMUSD10Y,
1,286%,
it currently stands at around 1.30%, along with inequality rates involving expectations of annual price gains of around 2.3% over the next decade, and underestimate the risks of an extended period of higher US inflation.

And if these risks come to fruition, increasing long-term returns and increasing the yield curve just like in the first quarter, “this can lead to asset class volatility” as bonds are sold, the credit spreads are widening and stocks are shrinking, said portfolio manager Scott Ruesterholz of Insight Investment, which manages more than $ 1 trillion.

Recent comments from prominent investors such as Larry Fink of BlackRock Inc. and Jeffrey Gundlach of DoubleLine Capital only serve to underscore the concern that the market is being too complacent.

Two consecutive months of U.S. consumer price index increase or exceed 5% and have parts of the financial markets baffled. And the timely questioning of lawmakers during Fed Chairman Jerome Powell’s six-month testimony in Congress last week may have added to fears the central bank is misjudging the persistence of price pressures triggered by the pandemic, even when the president acknowledged “a shock going through the system associated with the reopening of the economy.”

A painful journey

“There’s definitely a risk that the market will go wrong,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management, which manages $ 33 billion in Horsham, Pa. The IOC sees the possibility of consumer price readings reaching between 3% and 4% over the next six months, as gross domestic product, or GDP, reaches 7% to 8% for the year, pushing the Treasury to ten years towards 2%. On the other hand, if higher inflation and slower economic growth occurs, this could create “a push-pull dynamic in rates that leaves the bond market more to deal with.”

Bond investors’ prospects are based on the rest of 2021. Fixed income is the hardest hit by all asset classes due to higher inflation, which erodes the fixed value of bonds, and some investors are unable to eliminate long losses. “There will be some tension in other asset markets,” Heppenstall said in a telephone interview. “But for long-term bond investors, it could be a painful journey.”

There is another Fed fabrication

Investors are looking largely beyond U.S. economic reports for next week, which include housing-related data Monday and Tuesday; weekly unemployment claims Thursday; and monthly manufacturing and service purchasing managers ’indexes on Friday. They focus instead on the July 27-28 Fed meeting in Washington, where policymakers are likely to continue their discussions on reducing bond purchases as they adopt what Powell calls a more “humble” mindset. on inflation.

Fed officials will be in a traditional speech shutdown period next week, which will lead to this meeting.

Inflation forecast

Meanwhile, several forecasts are already being prepared for months of high prices, well above the Fed’s 2% target. Fannie Mae economists predict that consumer prices will remain around 5% year-on-year until the end of 2021. Those at Barclays Plc expect the global CPI to reach 6% year-on-year in December, while Wells Fargo & Co. expects a 4% year-round rate, which means readings should continue around 5% until the end of December.

Ruesterholz, of Insight Investment, sees inflation likely to continue to exceed 3% until the second quarter of next year, amid strong US economic growth, before falling from 2.25% in 2.5% by the end of 2022. This is due to the pressure of the reopening of hotels, the increase in consumer travel and sales of used vehicles should ultimately dissipate, while the chains of Interrupted supply will likely be “repaired,” says the New York-based portfolio manager.

Ruesterholz says Insight invests in high-yield “growth-sensitive assets” that are lower in credit quality and secured loan obligations, or CLOs, and that he believes treasury-protected securities or TIPS are a form. ” interesting ”to play a higher inflation scenario.

Take a look at: As inflation rises, BlackRock’s investment strategy eShares Pro says customers are “confused by interest rate movements”

“We need to be aware that the forces that keep inflation high have been much stronger than expected, and we run the risk that the longer it goes on, the more likely inflation is to bleed into other categories, investor psychology and expectations.” , he says. .

Equity prospects

Last week, the Nasdaq Composite Index COMP,
-0.80%
ended the lowest week for the first time in about a month and the RUT Russell 2000 small-cap index,
-1.24%
it fell more than 4.5%, marking the worst week of October 30 and the third consecutive weekly decline.

In other words, in absolute terms, neither growth stocks, highlighted on the technology-laden Nasdaq, nor the stock sector, reflected in the Russell, performed well in July.

What works? The biggest of the big ones surpass, so far, with the Nasdaq Composite Index COMP,
-0.80%
increased by approximately 1.2% per month. This dynamic is also helping the S&P 500 SPX,
-0.75%
and the Dow Jones Industrial Average DJIA,
-0.86%
won so far this month.

“The S&P 500 has risen 4% since June 3, but 80% of that move can be attributed to the five largest stocks,” wrote Larry Adam, CIO of Raymond James’s wealth management unit , in a weekly research report.

That said, Adam said he is not overly concerned about the narrow breadth of the winning shares.

“Reducing the amplitude is a sign of internal weakness and can sometimes precede periods of decline. We are aware of this, but we do not worry too much, given the strong technical context in the medium term along with the market trend.
for the rotation of the latel sector ”, he wrote.

Maximum earnings?

John Butters of FactSet Research says 85% of S&P 500 companies have so far reported positive earnings per share surprises for the second quarter.

“If 85% is the final percentage, it will mark the second highest percentage of S&P 500 companies that will report positive EPS surprises since FactSet began tracking that metric in 2008,” he wrote Friday.

He said the combined earnings growth rate, including actual results and estimates, for the second quarter of 2021 for the S&P 500 is 69.3%, marking the highest year-over-year earnings growth reported by the ‘index since the fourth quarter of 2009 (109.1%), if the figures remain the same.

Adam says the better-than-expected quarterly results for U.S. companies are “attributable to the staggering resilience of the U.S. economy; however, as the reopening takes place fully, much of the analysts ’estimates that cloud uncertainty will diminish and the magnitude of gains will also be exceeded.”

Raymond James will seek further guidance from CEOs and CFOs on how things are shaping up over the next three months and the full year.

REPORT ON WANTED INCOME FROM JULY 19 TO 23
MONDAY: IBM, Tractor Supply, JB Hunt
TUESDAY: Netflix, Chipotle
WEDNESDAY: Coca Cola, United Airlines, Johnson & Johnson, Verizon, Texas Instruments, eBay, Anthem, Baker Hughes
THURSDAY: Intel, Snap, Twitter, American Air, AT&T, Domino’s, Biogen, Abbot, Equifax
FRIDAY: American Express, Schlumberger



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