Are things like inflation and rising bond yields really a concern for the market? Commodity prices keep surging, inflationary pressures are evident and the vast increase in money supply provides the ammunition. Average inflation targeting by the Fed provides the necessary context. PMIs last Friday pointed to higher inflation coming through. Substantial price increases for inputs such as PPE led to the fastest rise in “cost burdens” since October 2009, when the index started. Moreover, strong demand allowed firms to pass on the cost increase by raising selling prices. The rate of inflation in what firms charge customers was the second-fastest on record (behind only November 2020). In the UK, the composite PMI showed that “cost pressures intensified across the UK private sector during February”. Yields on government bonds continue to march higher. US 10-year Treasuries trade close to 1.4 per cent, a year high. The spread between 2s and 10s is at its widest in four years at 1.28 per cent, whilst the 5s30s spread is at a 7-year high at 1.57 per cent. UK gilt yields are at year highs above 70bps and 2s are at their highest since April, suggesting the market doesn’t think the Bank of England will go for negative rates.
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