Progress continues in Washington on approving the Biden administration’s stimulus deal, targeted to be around $1.9 trillion. The U.S. economy continues to have a choppy recovery, while interest rates are starting to move higher. The path of yields appears to have broken out to the upside, as the 30-year Treasury traded above 2% yield for the first time since the pandemic began. The combination of tremendous fiscal stimulus and zero-interest-rate monetary policy has had a significant impact on markets and pushed prices higher across many asset classes. Even the price of oil has made recent highs at above $57 per barrel. Speculative excess in financial markets also appears to be growing, with abundant availability of money.
Many parts of the economy are still struggling and need assistance, but as coronavirus vaccines and herd immunity hopefully cause the pandemic to fade, the impact on inflation and deficits will become a larger factor for financial markets. I expect the yield curve to continue steepening and interest rates to continue creeping higher for the next few months. I’ll be watching the inflation data this week as, to date, we have not seen asset price inflation move into the rest of the economy.
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