The Weekly Commentary - 05/17/2021

Inflation and treasury yields

Inflation continued to be a hot topic in the world of finance this week. It saw a year-on-year rise of 4.2% in April. While some of this can be attributed to last April’s numbers being exceptionally low due to the start of worldwide COVID restrictions taking hold, the month-on-month increase was still higher than many market commentators expected. The expectation was for inflation to be 0.2% up from March, when it was really 0.8%.

The impact on treasury yields has been felt already. While the Fed Chairman, Jerome Powell, is staying strong in his belief that the volatile price rises are to be short-lived, treasury prices on 10 year notes rose by 1.641%. Longer spanning 30 year treasury bonds moved very little in comparison. Inflation often causes yields to rise as investors seek a higher return to reward them for investing in a higher risk product. Given that the risk of inflation is increasing at the moment, promising to erode purchasing power, yields have to rise while treasury prices fall.

The movements show that many investors are worried about the Fed raising interest rates to keep inflation in check. Investing has long enjoyed historically low interest rates, for well over a decade now. At a time when global recoveries are fragile, albeit happening at a faster rate than expected in many places, any rises in rates will upset the apple cart.

That being said, for the common investor and not the professional trader, the impact of inflation and rising interest rates can mean that better savings rates are available at banks.

Mortgage Refinancing

Mortgage refinancing demands went up this week thanks to rates dropping for a short time. Individuals scrambled to make the most of the slight dip in fixed-rate mortgages to reduce their monthly payments. Interestingly, as loan balances across the board went up again (for the fourth week in a row), it was clear that those with higher amounts left on their mortgages were the quickest to take action. In total, applications to refinance on a mortgage went up 3% this week in comparison to last week’s numbers.

The mortgage market in general is an interesting one to keep an eye on while the country recovers from the shock of the COVID-caused recession. While numbers from last year are skewed, mortgage applications in general rose 1% this week – that is 13% up on this time last year. Supply issues will remain a problem while there is a lack of new housing coming on to the markets.

Mortgage refinancing can be a tricky beast, but it shouldn’t be. The process is straightforward if you have the patience to go ahead and apply for a mortgage that better suits you. When rates dip like they have this week, they can have a material impact on the amount you pay each month.

Gas prices shoot up

At the end of last week, there was a cyberattack on the energy supply operator, Colonial Pipeline. It is thought that hacker group DarkSide may have been responsible for the attack which the FBI has been brought in to investigate. The company itself is still not sure how long the outage will last and can only bring the pipeline back online when it is entirely safe to do so.

The impact of that uncertainty has been felt this week with gas prices at the pump going up and hitting $3 a gallon on average across the country. Colonial Pipeline is one of the biggest providers of fuel across the US and its sudden halting of operations has meant a massive shortfall in supply. The price of fuel is consequently the highest it has been since 2014.

One of the main issues that continues with the outage is not knowing how long it will last. Three scenarios are widely seen as potential timelines for when the pipeline may come back online. Those three timelines vary substantially. While one scenario sees the pipeline coming back online in only a couple of days, another predicts the outage could continue for more than 10 days. In such an instance, there will be mass fuel shortages in a lot of the South East of the US. To put that into finer perspective, there are over 50 million people living in the South and East regions of the US. Just around memorial day weekend too. Long lines at pumps are to be expected in such a scenario.

Investor Complacency

Inflation also hit equity markets this week with even the tech giants seeing a volatile few days in their stock price. Some investors argue that equity markets are in for a difficult time as rising inflation means that the Fed and the Government will have to curb, if not halt, their highly accommodative post-pandemic support.

There are other forces at play here that could exacerbate the situation along with rising inflation. Issues such as rising prices in China and issues caused by lack of supply of gas (pushing prices higher very quickly) all have an impact on the market and some investor sentiment – but not all.

And that in itself could be a problem. Investor complacency has come about after years and years (if not a good decade) of loose monetary policy, seeking to encourage investment and growth. People are used to the relaxed position of the Fed. But, the quickening pace of inflation made worse by energy supply issues and rising prices in China, could force the Fed to raise those aforementioned interest rates. The Fed has been able to keep them low for so long because inflation has been so negligible. Now, it would appear, after years of continually missing the 2% target for inflation, it actually may run away from them too fast. But if the Fed is forced to take action, complacent investors may be caught out. That does not have to be the case, however. Staying on top of the latest stats and company news can be a great way of making fully informed investment decisions.