- US GDP miss shrugged off as Fed keeps goldilocks scenario intact for stocks
- Rising yields could come back to haunt investors
- Rallying crude and other commodities adding to inflationary pressures
So, the US GDP has just been released showing the world’s largest economy grew at an annualized rate of 6.4%, up noticeably from 4.3% in Q4 of last year, but below 6.7% expected. Weekly jobless claims and continuing claims also came in a tough softer than expected. Not that they mattered much, as US equity indices held onto their earlier gains while the dollar showed very little initial reaction. Investors are not too worried about the miss in GDP as the data is backward looking. Forward-looking economic indicators continue to point to strong recovery.
But the big macro event of the week saw the Fed stick to the script, keeping the goldilocks scenario in equities intact and US index futures have risen correspondingly ahead of the US open – though some of those gains are undoubtedly because of solid quarterly results from Apple and Facebook, especially the former. The Fed is not close to consider tapering bond purchases yet, Powell said. He also reaffirmed that transitory inflation rise above the 2% target would not convince them to start tightening monetary policy.
Investors will now be watching US bond yields closely as they, along with their European counterparts, are edging ever higher amid growing signs about a US-led global economic recovery. As global lockdown measures are slowly likely to ease, things will hopefully return to more normal ways in the coming months. The US economy is likely to maintain or accelerate its strong pace of recovery and inflation will probably heat up. Investors are pricing this in by pushing bond yields higher. Small and steady rise in yields will not scare the stock market bulls, but if they start to accelerate to the upside then it would suggest to me that growth optimism is slowly but surely being replaced by worries over inflation. This could therefore mean quicker tightening of central bank monetary policy than the Fed and some of the others have indicated. If the Fed were to start tapering bond purchases later in the year, this will likely put further upward pressure on bond yields. Rising yields are seen as negative for the growth stocks, whose dividend yields are comparatively lower than what you would get from fixed income.
Commodities rally adds to inflation worries
Also adding to inflationary pressures are rising input costs for manufacturers and producers, as prices of raw materials and commodities continue to rise sharply. For consumers as well, housing costs are on the rise across the western world, as years of cheap borrowing costs have led to a boom in house buying.
Adding fuel to the inflationary pressures:
- Crude oil prices were up 2% on the session today, extending their recent recovery amid demand optimism. Year-to-date, oil prices up more than 30%
- Copper is being up 25% higher on the year so far, adding to its large gains made in 2020.
- Iron ore and palladium are also up sharply, with the latter hitting a new fresh record high
- Then you have the softs, with corn rising 35% year-to-date, while the price of soybeans is up double digits, adding to last year’s 38% gain.
You get the picture – input costs are rising and these raised input costs will be passed on to the consumer, leading to higher inflation rates in the coming months. If these input costs do not come down sharply, then you will have to question the Fed’s logic. So, against this backdrop, there is the potential for central banks to turn hawkish rather quickly, certainly quicker than they are publicly admitting.
Here are some yield charts to watch closely:
Source for all charts: ThinkMarkets and TradingView.com
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