Displaying items by tag: inflation

(Washington)

Everything you think about the direction of rates could be wrong. That is the general fear after this week’s inflation report. US core consumer prices hit a one-year high in August at 2.4% year-on-year growth, ahead of the Fed’s target. Importantly, it was also a bit higher than expectations. The Fed’s new cutting agenda is partly predicated on the fact that inflation has been so subdued, so any change to that assumption could prove disruptive to a cutting cycle.

FINSUM: We don’t think one month’s report will change the Fed’s path, but it is certainly something to keep an eye on. It is going to make September’s inflation report a lot more important.

(New York)

Negative bond yields dominate the globe, and US yields are headed inexorably lower. The bond rally that has unfolded year is hard to over-state, with the 30-year Treasury at an all-time low. However, all those gains look likely to reverse sharply, as signs are on the horizon that US inflation is about to jump. The trend in CPI looks likely to show a bump after a series of lower annual highs. The movement is exactly the same as the one that preceded gold’s big jump this year. According to the data, CPI looks likely to rise to 2.5%, which would virtually eliminate the possibility for negative yields on the 30-year bond.

FINSUM: While calling higher inflation is a dangerous game in the post-Crisis world, the general analysis here is reflective of the fact that yields are way too low for how healthy the economy looks in data.

(Washington)

Jerome Powell’s performance could not have been much better. He gave exactly what the people wanted—dovishness. In fact, if anything, he was almost comically dovish, disregarding the very strong jobs performance last month. No matter though, investors are pleased as it now looks nearly 100% likely the Fed will cut rates later this month, and seems as though they will stay on a cutting path for some time. The Fed’s shift in policy appears to affirm that they are currently considering the condition of the global economy as a major threat to the US.

FINSUM: The Fed is in a pretty easy spot if you think about it. Inflation is very low, markets want cuts, and the global economy is looking weak. Simple solution with no real downside—cut rates.

(New York)

The White House is considering a new plan to cut capital gains taxes. The administration is seeking to do so by indexing capital gains rates to inflation, a move that would significantly help wealthier Americans lower their tax bills. Interestingly, the White House is considering advancing the bill in such a way as to bypass Congress. The impetus for doing so is that they want to make sure the changes hit before the 2020 election.

FINSUM: This is quite logical and could have a big impact. Imagine you could exclude 2% of an annualized 8% gain from all capital gains taxes!

(New York)

Gold has been doing well recently. Between global trade turmoil, a falling economy, and decreasing yields, the metal has thrived. Here are three reasons the gains won’t reverse. The first is that the stock market continues to look risky, meaning gold’s allure as a safe haven seems assured. Secondly, yields on bonds have a definitively downward direction, which makes gold more attractive. Finally, inflation is unlikely to stay low forever. When it starts to rise, it would give investors another reason to bet on gold instead of bonds.

FINSUM: We don’t really think inflation will be much of a factor for gold in the immediate term, but the first two points are material.