Daily Commentary BY THE CURVE TEAM –

Inflation Speculation Continues

9th of February, 2021

Following a big week for the RBA yesterday, speculation of inflation running hot continues.

The bond market is showing weariness of runaway inflation. For the first time in a long time there is potential for both demand and supply side inflation.

Demand side inflation could occur from the swathes of liquidity being provided by central banks around the world and the world emerging strongly from covid. Supply side inflation could come from supply disruptions from covid and continued global trade tensions.

Across the developed world, yield curves are steepening as the short end of the curve lowers and the back end creeps higher. This is in spite of QE programmes aimed at the back end of the curve.

Inflation indexed bonds and inflation swaps are also pointing to higher inflation expectations.

This doesn’t imply inflation is inevitable. Market pricing still has inflation below or within central bank target bands for the most part, even up to 10 years.

As the economy recovers from covid, there will be a lot of slack to make up, meaning inflation pressures will be muted. Nonetheless, if the chips align for inflation to heat up, even if it is a small probability, it is worth being mindful of.

Today the NAB Business Survey for January is released. We will also put out our monthly economic insights, which discusses the potential for inflation among other rates and economic issues.

Josh Stewart

Associate - Money Markets