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Inflated Expectations

• It’s all about inflation now, but when we first raised the prospect of fast rising prices in August, we received a considerable amount of push back. We continue to be concerned over producer inflation and anticipate this will slow the economic recovery once cheques, furloughs, etc., are ended, and this may be reflected in a surprise rise in unemployment in Q3; therefore, we also expect Savings Rates to remain elevated. MT Aug 24: ‘We have argued that it is demand that determines growth, but that it is supply that dictates inflation, and economies will react accordingly. For this reason, low unemployment or, rather, high employment, means an economy can produce more, and keep prices low, and although this may be at odds with traditional economic theory, this has dictated economies since the mid-1940s, and is why inflation targeting has failed. A shock that unbalances the economic norm and that destabilises productivity, creates uncertainty and a fall in demand, forcing governments and central banks to step in. Supply will react and be reduced, and inventory levels lowered and, as a result, inflation can start to become a problem’.

• IN AUGUST WE TARGETED 10 YEAR YIELDS TO RISE TO 1.55% & CURVES TO STEEPEN 5Y-10YR FROM 0.68%

• There is a view that inflation is transient, but we think supply chain problems will continue well into 2022, while at the moment there is a labour shortage for several reasons, including inbound flights with foreign labour
• The loss in ocean capacity resulting from carrier schedule changes after the Suez Canal blockage is expected to stretch into June, according to analysis of carrier schedules by Sea-Intelligence
• Canadian Raw Material prices rose over 34% yoy and PPI of 10% was the fastest rise in over 40 years
• Chinese new home prices rose again in April, fuelled by hot demand in smaller coastal cities, as housing market strength in major centres tapered off due to tighter restrictions
• On Wednesday, the US Treasury will release its expectations for quarterly issuance, see MT April 29
• Spain 10 year yields have almost met our 0.50% target