Treasury yields typically don’t make headlines unless movement sparks enough interest. This is exactly the case in the bond market and it's garnering attention as we mull over the direction of inflation this coming year. Treasury yields started moving sharply higher this past month, charging from a summer low of .5% to the current 1.6% . These levels are still well below the 2.75% target we have over the next 18-24 months, but it has moved fairly rapidly. I never thought 27 years ago I’d craft a blog about a run on rates at 1.6%! Monetary policy has been very loose, so allowing the natural movement of the bond market to re-set a bit higher isn’t the worse thing. The fact that rates are moving higher is due to a real recovery on the economy. Fed Chair Powell’s comments this week offered reassurance that they still believe inflation is ‘soft’ and not a heightened concern as the employment picture still needs help.
The primary driver of GDP over the next few quarters is likely to be public health, as the nation continues to battle the pandemic. The employment environment is in better shape than it was nine months ago, though still far from strong. Consumer confidence is improving, and we expect that rising confidence will lead to continued growth in consumer spending. Auto sales have recovered, and the housing market remains strong. Businesses are again expanding. We expect further absolute improvement over the remainder of the year. On an annual basis, we look for overall GDP growth of approximately 3.2% in 2021 and 2.6% in 2022. There is also a fundamental shift in the equity markets, now favoring stronger returns from dividend paying companies that may benefit from the economic expansion. It’s the first time in a while that companies like Caterpillar & John Deere are outperforming Apple and Amazon!
We have attached an article from our partners at Alliance Bernstein‘Four Things Investors Should Know About US Inflation in 2021’. It takes a deeper dive into the inflation debate near term. I hope you find the update informative and please don't hesitate to reach out with questions.
Cheers!
Jay
Click Here for Alliance Bernstein Article
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