Weekly Charts
Each Thursday, the MCP Research team shares two charts we are currently looking at that bring insights into the current state of the markets. This week—inflation.
Deutsche Bank released a bombshell report earlier this week screaming hyperinflation, while the Federal Reserve continues to see the current inflationary pressures as transitory and tapering off as COVID-induced supply constraints ease. There’s a good case to be made for either scenario, but the financial markets seem to be siding with the Fed for now.
Today’s inflation report was a rather big surprise (3.8% year-on-year reported, versus 3.3% expected), although it didn’t have as much effect on the stock market as one would have expected. Long-duration assets that should be sensitive to inflation, like tech, rallied and the 10Y treasury yield continued its steady decline.
Figure 2 shows where we are in terms of yields versus inflation. The red dot represents today’s CPI report. Historically speaking, with CPI growth at 3.8%, the 10Y yield should be trading north of 7%. Today’s 10Y is still trading below 1.5%. Either the market is asleep at the wheel as the inflation freight truck is coming head-on, or we’ve entered a new paradigm where the financial markets are becoming entirely disconnected from the real economy. One thing is clear, this is not your grandfather’s market.
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