September Outlook
September 13, 2020  |  By Hank Cunningham

We expect the uneven U.S. economic recovery to continue; it may begin to falter unless another round of fiscal stimulus happens but that is looking unlikely over the near term.

Following the Fed’s revised approach to inflation-targeting, there appears to be a tug-of-war developing in the outlook for inflation. The evidence supporting higher inflation is visible in higher producer and consumer inflation, rising inflation expectations and firmness in commodity prices.

There remain deflationary headwinds, however, most notably demographics and technology. Much of the recent uptick in inflation may turn out to be cyclical. As well, there are skeptical analysts who doubt the Fed’s ability to push inflation higher.

We conclude that inflation will continue to firm but is unlikely to breech 2%. Central Banks everywhere in the developed world have anchored short-term rates close to zero, indicating that they may keep them there for years. The massive quantitative easing program in the U.S., which entails buying $80 billion of U.S. Treasury bonds and $40 billion of mortgage securities monthly, will continue indefinitely.

Negative bond yields may ease following the bottoming of producer prices, paving the way for higher nominal bond yields. The U.S. ten-year note may move all the way up to 1%!

Consumer confidence and retail sales will be key indicators for the trend of the economy and bond yields.

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