Last Wednesday’s data dump indicated an economy that is accelerating and inflationary pressures that are not transitory.  In my view one of the more significant data points was the measure of “inflationary expectations” contained in the University of Michigan’s sentiment survey.

Respondents indicated they expect inflation to rise 3% over the next five to 10 years and prices to rise 4.9% over the next 12 months, the highest since 2008.  As widely noted, markets trade on current and future inflationary expectations.  The former is the greatest since at least 1991 and the later since 2008.

Will the markets—specifically the fixed income market—have a sudden realization that bond yields are at unsustainable low levels causing a 150 to 200 basis point surge?  Such an increase is not unprecedented but the potential impact could be greatly increase volatility.

What are the odds that inflation could be 16% and nominal growth be 12% resulting in a negative 4% real GDP.  A dated St. Louis Fed suggested a possibility of inflation rising considerably higher than nominal GDP if monetary velocity or the turnover of money accelerates to 50% of its norm.

As written many times excess banks reserves are over $3 trillion versus the historical pre-pandemic level of $1 to $1.5 billion, reserves that are not earning interest.  Money supply growth has never been 32%.  Roughly speaking, economics 101 suggests money supply should equal productivity plus inflation plus nominal GDP.

Wow!  This is a radical thought but then again, I ask what has not been radical over the last several years.  The most glaring example is the almost $15 trillion of negative yielding debt. Such an environment was not even envisioned ten years ago and to the best of my knowledge discussed in any finance text book.

With the above written, however, QE has never been experimented at current level much less coupled with massive and unprecedented fiscal stimulus.

Speaking of stimulus and inflation, the Minutes from the recent Fed meeting stated “significant inflationary pressures has lasted considerably longer than expected, however prices are expected to moderate in the latter half of 2022.”    Regrading tapering, purchasing should commence in the immediacy and could perhaps be at a greater pace than anticipated.

Some have interpreted the Minutes as more hawkish as anticipated.

What will happen this week?

The economic calendar is comprised of a number of tier I indicators including several confidence surveys, ISM, Beige Book the BLS labor report.  How will the data/reports impact psychology?

Last night the foreign markets were mixed.  London was up 1.08%, Paris up 0.84% and Frankfurt up 0.47%.  China was down 0.04%, Japan down 1.63%  and Hang Seng down 0.95%.

The Dow should open moderately higher following Friday’s rout. Oil is up about 5% following Friday’s Omicron induced plunge.   The 10-year is off 22/32 to yield 1.56%.  The “market” is now pushing back the timing of the first hike in the overnight rate until August versus June.


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