In the meantime, the economy is looking at fairly blue skies.
Goldman Sachs on Friday nudged its Q4 GDP forecast up to 2.6 percent, and the Atlanta Fed, though off its recent high of a 5.4 percent projection, still sees first-quarter growth coming in at 4 percent.
Longer-term, though, the picture gets less clear, and that’s one of the things that has the market worried.
Investors have received several inflationary jolts over the past week and a half. These include Treasury Secretary Steven Mnuchin‘s seeming endorsement of a weak dollar that he subsequently insisted was taken out of context; a Federal Reserve statement seeing more price pressures ahead that would keep it on a consistent rate-hiking path; and most recently last Friday’s nonfarm payrolls report that showed average hourly earnings jumped 2.9 percent on a year-to-year basis.
A swelling budget deficit, then, will only be tolerated by the jittery fixed income market for so long. There already was talk Friday of “bond vigilantes” staging a buyer’s strike and pushing up yields.
With the Fed no longer buying Treasurys, losing a chunk of the private market would pose even more of a threat to yields, which move inversely to their prices. Higher yields, of course, also mean higher costs for all that government and private debt.
For the market, that takes out the key pillars for this bull market.
“Far from welcoming the additional boost to economic growth this year, the large declines in the
equity market this week suggests that investors are more focused on the prospect of significantly higher inflation as a result,” the Capital note said.
The Capital economists say they expect the Fed to hike rates four times this year — one more than central bank officials themselves have indicated. It’s a scenario that appears increasingly possible considering the hawkish rhetoric lately and sprouting inflation signs.
