It is becoming a tug of war of views between the Federal Reserve and the market on whether a “Fed Taper” is imminent during the second half. On one end of the spectrum, the Federal Reserve is downplaying the scale of recent US recovery, alleging that substantial economic slack remains. The sharp rebound in inflation was also deemed as “transitory” on the basis of base effects.
However, the bond market is suggesting otherwise. The US 10Y breakeven rate has risen to 2.4% while the UST 10Y yield has also hit 1.5%. The up move in bond yields reflects both rising optimism on economic growth as well as concern over inflationary pressures from rising commodity prices and wages.
Since early last year, global commodity prices have been on a one-way street. Brent crude oil is up 277% from its trough while the London Metal Exchange LMEX Index has also rallied 92%. In the US labour market, signs are also pointing to rising wage pressure as the output gap narrows.
Rising prices – set against a background of strong money supply – suggest that one can no longer be too certain that the recent rebound in inflation is “transitory”.