Increased Risk - Hot Inflation

Macro Perspectives: Thu 7 Jan 2021

We talked about the prospects for increased risk to confidence, surrounding the Electoral College count.

The expectation was that the risk to confidence would involve the objections to certain state delegates, and the potential for those states to be asked to clarify the constitutionality of the vote on those delegates. The debate on the first objection was just getting underway yesterday afternoon when the Capitol was overtaken by protestors.

Despite that, stocks held up throughout the afternoon. That's because the Senate race in Georgia looks like a democrat sweep, which would flip the Senate under a Biden presidency.

That scenario means a big government spend coming down the line - adding a multi-trillion-dollar spend to the existing mix of fiscal and monetary stimulus means the value of your cash is being trashed.

Translation: the value of money goes down, the price of things go up.

Following on from yesterday, the 10-year yield is the spot to watch for the signal that the market is coming to the conclusion that, not just some inflation, but hot inflation is coming - and that the Fed will be caught behind the curve. Even though the Fed continues to gobble up Treasuries, the yield on the 10-year traded as high as 1.05% - the highest since March 20th.

Add to that, if you're a global investor holding U.S. Treasuries, the domestic chaos gives you even more reason to exit what has long been deemed the safest, most liquid investment in the world (the U.S. Treasury market). That, of course, puts more downward pressure on Treasuries, upward pressure on rates - which would mean an even bigger challenge is ahead for the Fed.