DE | Weekly | Global Markets | Inflation and Interest Rate Angst and Rebalancing – 05/13/21

Posted May 14, 2021 by Diane Buscemi

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Inflation and Interest Rate Angst and Rebalancing
Allen Sinai and Rohan Kumar

Inflation and Interest Rate Angst
Inflation, in the latest data and anecdotally, and as a consequence of a “Boomlet” for the U.S. Economy as it exits the Pandemic, has moved sharply higher, raising the question of whether it is getting out-of-hand and will force the Federal Reserve to raise interest rates sooner than currently planned. Higher interest rates can lower valuations and potentially weaken the economy, so stocks are at risk on the interest rate effect from inflation and expected inflation.

Incredibly strong economic growth so far this year and a huge snap up for the economy are putting strains on supplies and bringing higher prices, especially for sensitive commodities from shortages in supplies, lengthening delivery times, and some rising costs. Inability to find workers fast enough to satisfy the surge up in jobs openings that is coming with super-strong growth in demands post-Pandemic is a wage cost-price risk. These factors are spiking up price inflation more typically seen much later in a business expansion and is showing up MoM in the PPI, CPI, and Consumption Price Deflator, particularly when arrayed against a year ago when the Collapse of the economy pushed prices into negative territory for a time.

Higher inflation typically occurs in a cyclical Recovery and then the much longer Expansion phase and is demand-based, with inflation rising more-or-less depending also on supply-side responses. The early signs of an inflationary process get reflected in rising interest rates and eventually less “Easy” Monetary Policy which, in turn, raises short- and long-term interest rates further.

During such periods, Consolidations and Corrections occur in an ongoing Equity Bull Market, based on the economic expansion and rising earnings, which, if demand-side in origin, as it is this Expansion, company earnings keep on rising and an Equity Bull Market continues.

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