Stimulus-boosted demand is still outpacing supply. The Atlanta Fed’s tracking estimate for U.S. 2Q real GDP is at 9.3% q/q annualized. Consumption should shift from goods to services over the next several quarters (pent-up demand). In the meantime we have inflation. U.S. core PCE inflation was 3.1% y/y in April. Central bankers have labeled price moves as transitory, but this position is likely to be challenged in the near-term given continued bottlenecks. U of Michigan surveys of inflation expectations (short-term and long-term) are rising.
April U.S. personal income declined after the recent surge due to fiscal transfers. Real personal income ex. transfers increased m/m, however, and the personal saving rate was still elevated at 14.9% in April.
The Chicago PMI surged to 75.2 in May, with unfilled orders & supplier delivery times indicating continued backlogs. Other surveys (PMIs, SLIM, Philly Fed, NY Fed) show similar issues. With U.S. core cap goods orders up +2.3% m/m in April and initial jobless claims falling to 406,000 last week, the need for emergency policy is ebbing.
Yet global central bankers are sticking by their models. The duration & composition of inflation (rather than the number we pop up to) is important for monetary policymakers. Alternate inflation data series such as the Cleveland Fed’s median CPI, the Dallas Fed’s trimmed mean PCE price index, and the Atlanta Fed’s sticky prices should continue to be important. These have not risen significantly yet.
Bottom line: as we’ve noted previously, models based on history miss outliers. Even if most of the current spike in inflation proves transitory, core U.S. inflation averaging above 2% (say 2.5%) the next 5 years is possible with ultra-easy fiscal & monetary policy. 2.5% is within the Fed’s pre-excused zone. That is, the transitory 2021 inflation could still leave lasting regime change (under 2% target to an above 2% trend) without offending the Fed. Markets are still digesting this possibility. The 10-year Treasury yield was 1.60% last week with WTI oil prices at $66.
Until bottlenecks are resolved (eg, labor disincentives, homebuilders backed up, chip shortages & autos, remaining hesitancy as vaccine rollouts are continuing, schools not yet fully open, longer-lasting changes in skill & preferences including retirements) firms are still relying on 1) increased hours by those willing to work and 2) increased output-per-hour where possible.
We continue to be focused on this setup: going in to August, we could have: 1) payroll seasonals reversing & driving up job gains; 2) vaccine + natural immunity built; 3) U.S. virus case numbers staying low due to summer weather; 4) expanded Federal benefits set to end; 5) global supply chains healing some; 6) preparations for schools to reopen full-time, and 7) a string of higher inflation readings (including expectations).
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by FactSet.
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