Are inflationary expectations about to become unanchored, a horrifying question given that the county is $37 trillion in debt and interest expense is now over $1.1 trillion, up from $350 billion four years ago?
A major determinate of bond yields and monetary policy is inflationary expectations.
Inflation is defined as too much money chasing to few goods fearing higher prices tomorrow. It has a monetary and psychological component.
As recently as last week the FRB Chair stated that inflationary expectations are well anchored.
According to the widely followed and influential University Michigan Sentiment Index, long term inflation expectations rose to the highest level in almost three decades on concerns tariffs will translate into higher prices.
Specifically, consumers expect prices will climb at an annual rate of 3.5% over the next five to ten years according to the final February reading from the University of Michigan. The rate is the highest since 1995. The survey indicated that this expected increase was almost entirely driven by respondents who are Democrats.
Because of these rising expectations, the overall index fell more than anticipated. Here too the result was politically polarized with Democrats driving the decline.
Last week I had commented that the “inflation expectations sub index” has been all over the place, depending upon the groups surveyed. Different groups have widely different views of the economy and inflation, and this difference matters regardless to who is right.
It affects business, investment and consumer spending decisions in perhaps ways that we may not have seen before.
Bond prices, however, rose on Friday as several global inflationary indices were considerably lower than analysts’ views.
Commenting about equities, stocks got hit following WMT’s clouded outlook given the current geopolitical and macro-economic outlook and news that Untied Healthcare may be investigated by the DOJ for Medicare billing practices. The economic data was a contributory factor in Friday’s selloff.
What will happen today?
The economic calendar is comprised of several housing statistics, a sentiment survey, revised GDP, and some manufacturing indices.
Last night the foreign markets were mixed. London was down 0.01%, Paris down 0.39% and Frankfurt up 0.65%. China was down 0.18%, Japan up 0.26% and Hang Seng down 0.58%.
Futures are up about 0.5%. The 10-year is off 2/32 to yield 4.45%.
