Should investors prepare for higher inflation in the US?
Investors bracing for higher inflation this year will on Wednesday receive the latest reading on US consumer price rises, amid signs that the country’s economic recovery is stalling.
According to a consensus forecast compiled by Bloomberg, economists predict a month-on-month rise of 0.4 per cent in the consumer price index for December. On a year-on-year basis, they expect prices to have increased 1.3 per cent.
Investors have accepted that economic growth in the coming months will be sluggish, especially with the surge in coronavirus cases globally and the tightening of lockdown restrictions. In December, the US economy shed jobs for the first month since last April.
However, vaccine breakthroughs and last week’s confirmation that the Democratic party will have sweeping control of Congress as well as the White House have revitalised bets that higher growth and, in turn, inflation are on the way.
The wager rests on the assumption that a Joe Biden administration will sign into law a new stimulus package beyond the $900bn programme agreed at the end of last year.
Keith Wade, Schroders’ chief economist, reckons it could tally up to an additional $900bn in support, helping to boost economic growth by a full percentage point.
As forecasts have moved higher, so too have market measures of inflation expectations. The 10-year break-even rate, which is derived from prices of inflation-protected government bonds, recently climbed above 2 per cent for the first time since 2018.
The prospect of swifter price increases has hit US government bond prices particularly hard. Last week’s sell-off pushed the benchmark 10-year bond yield above 1 per cent for the first time in nearly 10 months. By year-end, many strategists believe it could reach 1.2 per cent or higher. Colby Smith
Can gold hit $2,000 an ounce?
Gold’s strong run into the new year fed expectations of another rally for the precious metal, following its surge to a record of $2,072 an ounce in August due to the economic fallout from Covid-19.
Last week, gold reached a two-month high of $1,959 a troy ounce, driven by rising inflation expectations — the metal is commonly used as a hedge against price rises — and the continued spread of coronavirus in major economies.
But the rally then hit a roadblock after Democratic candidates secured victories in two crucial Senate run-offs, handing the party control of both branches of the US legislature. The resulting bond market sell-off pushed up yields, denting the relative attraction of gold, which does not provide investors with any interest. Gold ended the week at around $1,850 a troy ounce.
Still, analysts point to a number of reasons why gold’s run higher may resume. A Democratic-controlled Congress is expected to pass more spending and fiscal support packages that…
Read More: Should investors prepare for higher inflation in the US?