Technology is inherently disinflationary. From consumer electronics, to appliances, to automobiles; capabilities of goods (and services) have tended to increase at a faster pace than or, in some instances, in the absence of price increases. Thus, technology augurs for low inflation.
3) A New Oil Production/Consumption Paradigm
4) Monetary Policy Renormalization
In my opinion, when one takes a complete view of economic and monetary policy conditions, one cannot help but to conclude that we are in a structurally slow growth and low inflation environment. Fiscal policies could boost economic growth and/or inflation, but if inflation pressures surge, the Fed is likely to tighten monetary policy at a quicker pace.
The Fed has a mandate, given to it by Congress, to maintain price stability, along with a secondary mandate to maintain full employment. The Fed has no obligation to support political agendas or manage market volatility.
In my view, we are likely to see 2.00%-area GDP, for the balance of the current expansion cycle, with the occasional quarterly GDP print around 3.0% and the occasional GDP print around 1.0%. It appears that it is for this scenario that the UST market is pricing. If you have been following Bond Squad, you knew that already.
It has been popular to assume that, when the Fed does reduce the size of its balance sheet, long-term UST yields would surge higher. I have pointed out, on numerous occasions, that since the Fed’s holdings are weighted on the mid-portion of the yield curve, it could be the five-year UST yield which rises more than 10-year or 30-year UST yields. This has happened, particularly after the Fed announced its plans to shrink its balance sheet. Those looking for surging long-term rates because of a reduction of Fed reinvestment are likely to be disappointed.
Those of you looking for a pickup inflation might get your wish, in July, at least to some extent. From 6/29/16 to 8/2/16, the price of WTI crude oil fell about 10 points to $39.51 a barrel. Thus, if oil prices can hold in the low $40s, we could see headline inflation measures pick-up, albeit modestly, over the next month. However, after that, annual oil price comps could be negative, thereby suppressing headline annual inflation readings.