Daily Commentary BY THE CURVE TEAM –

Inflation Brings Mixed Response

14th of May, 2021

The surge in US inflation was met with a mixed reaction from markets.

Initially, treasury yields in the US rose to price in higher than expected inflation. Equities on the other hand fell on concerns that interest rates would rise sooner than expected.

Overnight, this reversed. 10 year treasury yields fell 2.6 points and equity markets in the US were up over 1%.

The contrasting responses since the strong inflation numbers are indicative of the uncertainty in the outlook and the volatility that comes with it. There are many new paradigms in the post covid world that have few historical comparisons.

Fiscal spending is at very elevated levels, monetary policy is as lax as it has ever been and central banks targets are more content letting inflation run hotter for longer, at least in their forward guidance. Add to this the unknown of how much consumers will spend after being in lockdown for an extended period and it is very difficult to forecast the economy.

Australia is still grappling with the uncertainty of covid. Victoria and NSW have recorded cases recently which have not resulted in a cluster.

Nonetheless, before the majority of the population is vaccinated there is the risk that part of the country will go in to lock down. Even if the population is vaccinated, there is uncertainty about borders re-opening with other strains proving very difficult to contain.

Josh Stewart

Associate - Money Markets