Analysis: transient or here to stay? Investors try to read inflation indices
NEW YORK, June 15 (Reuters) – From timber prices to wages and stocks: Reading inflation indices has become an obsession with investors.
The combination of supply bottlenecks resulting from the reopening of the global economy and resuming economic growth pushed consumer prices up in May by the biggest annual jump in nearly 13 years. Employers are raising wages as they compete for scarce workers while retailers have limited stocks due to shipping and production delays. L2N2NR2Q5 read more
However, as investors weigh the risks of rising prices in financial markets, some believe the biggest inflation gains are already in the mirror. This is consistent with the Federal Reserve’s notion that inflation will be “transient”.
The Fed is meeting Tuesday and Wednesday, and investors will analyze every word of its post-meeting statement.
The Fed bought $ 80 billion in treasury bills and $ 40 billion in mortgage-backed securities each month, putting downward pressure on long-term borrowing costs to encourage investment and l ‘hiring. Discussions on reducing such purchases are likely at this week’s policy meeting. Read more
“As long as the increase in inflation is modest, stocks could continue to rise,” said Russ Koesterich, portfolio manager of the $ 27.6 billion BlackRock Global Allocation Fund.
Koesterich believes inflation will likely break trendlines through 2022 given bottlenecks in global supply chains. Yet disinflationary forces such as the aging of the world population and the efficiency gains due to technology will make it possible to contain “any inflationary scares in the style of the 1970s,” he said.
Investors who bet on inflation typically head to groups better positioned to deal with price hikes, such as materials and energy and companies with pricing power. Value stocks, on the other hand, are benefiting from a general economic recovery that is not weighed down by the sharp rise in prices. Read more
Koesterich said his fund had reduced its positions in growth stocks like technology and added to industrial companies and European banks.
Jeff Mayberry, portfolio manager of DoubleLine Strategic Commodity, believes May’s inflation numbers will be the highest for the rest of the year and remains bullish on oil, which hit a multi-year high on Friday. He sees the commodity benefit from economic growth.
“The market was looking for a reason for inflation to be transient and they figured it out,” Mayberry said of May’s inflation figure, noting that some of the biggest contributors were from short-term factors such as a surge in rental car prices.
Ernesto Ramos, chief investment officer at BMO Global Asset Management, also considers the price increases to be transient. He cites a drop in lumber prices from the May high that suggests supply chain bottlenecks will ease and “give us another reason to believe inflation will stay under control.” Lumber prices have fallen by more than 40% from the records reached in early May.
REASONS FOR CONCERN
While the majority of investors believe inflation is transient, according to a survey of Bank of America fund managers, concerns remain.
“Inflation has been the most discussed topic with clients for weeks, bordering on obsession,” wrote Morgan Stanley analysts led by Michael Wilson. These analysts believe that the rate of change in inflation is peaking.
Greg Wilensky, head of U.S. fixed income at Janus Henderson, said he was buying more inflation-protected Treasury securities as the break-even rate – a measure of expected inflation in the bond market – fell back to near February levels.
While it does not “change my base scenario” that high inflation will turn out to be transient, “the risks around the base scenario continue to tilt towards higher inflation,” given the persistent difficulties that governments face. companies are meeting to hire lower paid workers, Wilensky mentioned.
The Fed’s statement could give some important clues.
“I’ll be watching the Fed on Wednesday and if they treat these numbers nonchalantly, it’s a green light to bet heavily on inflation,” Paul Tudor Jones of Tudor Investment Corp told CNBC on Monday. He said he would be “really concerned that inflation is transient” with stocks at a “record high” as demand “screams”.
Morgan Stanley CEO James Gorman told CNBC on Monday that “my gut tells me that this economy is recovering faster, that inflation is moving faster, and that inflation may not be as transitory as we all think.” He cited the global economic recovery and record levels of fiscal and monetary support.
“While investors disagree with the Fed’s oft-repeated mantra that inflation is only transitory, they have learned to respect the massive influence of the world’s most powerful central bank when she has such a conviction that she doesn’t even think of thinking about loosening her foot from the stimulus accelerator, “said Mohamed El-Erian, chief economic adviser at Allianz. “The resulting comfort with continued ultra-loose financial conditions is favorable in the short term with high stock prices and low returns.”
Reporting by David Randall; Editing by Megan Davies and Dan Grebler
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