Inflation Back, Deflation Demons ‘Dead’, Growth Ahead

Inflation Back, Deflation Demons ‘Dead’, Growth Ahead

Inflation Back, Deflation Demons ‘Dead’, Growth Ahead


The “Demons of Deflation” are in the dust-bin on a uptick in price pressures globally, prompting investors to seek protection in inflation-protected bonds.

A year ago, it was deflation, falling prices that restrain consumer spending and economic growth that plagued investors and central banks, keeping in place the ultra-easy monetary policy that has pushed government borrowing costs in much of the developed world below Zero%.

Market pricing continues to points to subdued long-term inflation but evidence that price pressures are rising, coupled with talk of a sizable US fiscal boost, means investors have backed away from the most bearish inflation bets placed after last year’s vote in Britain to leave the EU.

The benchmark Barclays World Government Inflation-Linked Index, is up almost 2% from a 9-month low hit in December.

The difference between the yield on an inflation-protected bond and a nominal bond of the same maturity aka the breakeven rate, has widened in Europe and the United States over the past several months reflecting rising inflation expectations.

Break even rates in the United States are around 2% for 10-year debt, having hit their highest levels since September 2014 in January. That compares with around 1.5% last July, when investors bet the Fed would miss its 2% inflation target over a 10-year frame.

If inflation, on average, is higher than the breakeven rate, linkers will outperform their fixed-rate peers.

The  Fed’s favored inflation measure, the core PCE price index, notched up its biggest monthly rise in January and was up 1.7% Y-Y. The Fed is expected to raise rates on Wednesday, a move viewed as unlikely just a few weeks ago.

Analysts say skepticism about a sustained recovery in inflation after years of weak economic growth explains why investors are creeping rather than piling back into linkers.

30 year breakeven rates in the Eurozone, for instance, at 1.60%, suggest long-term inflation expectations remain subdued, but are up from record lows just above 1% seen in July last year.

The ECB said last week that it no longer sees a risk of deflation in the single-currency bloc, fanning talk it may start to scale back its monetary stimulus this year.

For some investors, fears that far-right anti-euro French presidential candidate Marine Le Pen, tipped to contest a final run-off round of voting in May, is a reason to buy French inflation protection since a new French currency would fall and inflation rise if France were to exit the Euro.

Other market gauges such as the 5 year, 5-year forward inflation rates , also point to a rise in investors inflation expectations, although those rates have slipped in recent weeks, reflecting a general move into safe-haven assets related to French election jitters.

HeffX-LTN believes that actually growth and inflation news will continue to surprise on the upside, and the market is too Bearish on economic prospects in light of the Trump Administration forging economic policies.

Wednesday, the US major stock market indexes finished at: DJIA +112.73 at 20950.10, NAS Comp +43.23 at 5900.05, S&P 500 +19.81 at 2385.24

Volume: Trade on the NYSE was heavy with 1.07-B/shares exchanged.

  • NAS Comp +9.6% YTD
  • S&P 500 +6.5% YTD
  • DJIA +6.0% YTD
  • Russell 2000 +2.0% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Bullish (0.33) Neutral (0.15) Bullish (0.35) Very Bullish (0.50)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Bullish (0.44) Bullish (0.29) Very Bullish (0.50) Very Bullish (0.54)
HeffX-LTN Analysis for QQQ: Overall Short Intermediate Long
Bullish (0.47) Bullish (0.48) Very Bullish (0.50) Bullish (0.42)
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Bearish (-0.40) Bearish (-0.38) Bearish (-0.46) Bearish (-0.38)

Stay tuned…

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