Reflation Or Inflation?

by Adam Button

We couldn’t read an article or watch financial TV for any stretch on Tuesday without hearing the worlds ‘inflation’ and ‘reflation’ but the Fed continues to preach that they will look beyond short-term price rises. The was the top performer while the lagged. Meanwhile, Ashraf shares a few charts—the upper left chart shows how the break out in real yields is (red graph) is threatening , which is boosting the (lower left chart, while Gold/Silver ratio remains pressured but supported. 

GOLD-SILVER-REAL-USD Chart

GOLD-SILVER-REAL-USD Chart

US yields busted through the 1.20% barrier on Tuesday, piercing a double top and promptly running to 1.30%. US broke through 2% in a similar manner.

The moves in bonds kicked off a big bid in the US dollar and USD/JPY hit a 4-month high at 106.00.

The market is increasingly focused on the post-vaccine economy and the likelihood (certainty?) that prices will rise with the surge and demand and against the backdrop of very easy y/y comps.

The trigger this week may have been energy with following above $60 and prices surging on cold weather. Lumber and metals prices are also at multi-year highs while consumer goods continue to be short supply.

The Fed introduced a new communication angle on Tuesday with SF President Daly saying “unwanted” inflation is not a practical risk and that fear of inflation could cause millions of jobs.

We’d argue that real inflation could unchecked by a complacent Fed cause millions more but that’s the debate that will rage in markets in the months ahead.

As for bonds, the break higher leaves little standing in the way of 1.50% in 10s but so far equity markets have taken the medicine without a hiccup. 

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