The U.S. TIPS/Treasury breakeven rate, which is the difference between the nominal yield on the Treasury and the promised real yield on Treasury Inflation-Protected Securities (TIPS) of the same maturity, is often used to value the market’s expectation of future CPI inflation. Recent upward momentum in such breakeven rates suggests that some investors have radically upgraded their views concerning inflation over the next 5, 10, 20 and 30 years. As illustrated in the chart, long-term inflation expectations are now far above their 2020 lows. Nowhere is this more notable than in the 5Y breakeven rate, which hit a 10-year low of 0.2% in March 2020 and has since increased by 2.6 percentage points, as of last week, to its 10-year high of 2.8%. Longer maturity breakeven rates have also increased dramatically, and now all sit comfortably above the Fed’s long-run goal, even recognizing that the CPI inflation rate normally runs 0.3% higher than the Fed’s preferred PCE deflator target. Another signal comes from the Philadelphia Fed’s 2Q21 Survey of Professional Forecasters, which predicts that headline CPI inflation will average to 2.3% over the next decade. It is notable that this 10-year prediction has been revised upward each quarter over the last year. Higher inflation expectations beg the question of when the Fed may begin to raise rates. As higher inflation materializes, investors may want to be positioned in value stocks, real assets and inflation-protected bonds as these securities fare better in a hotter inflationary.
Happy Monday. Good Luck out there this week.
Global Spotlight
The preliminary list of Iranian presidential candidates. Iran’s Guardian Council is expected to publish by May 27 its preliminary list of qualified candidates to run in the country’s upcoming presidential election.
An Australian blogger goes on trial in China. Australian blogger and democracy advocate Yang Hengjun will go on trial May 27 in China after being detained since January 2019 on charges of espionage; the Australian Foreign Ministry’s request for access to the closed trial has been denied.
Improved France-Rwanda relations after years of animosity. French President Emmanuel Macron on May 27-28 will visit Rwanda, meeting with Rwandan President Paul Kagame as the two countries look to improve their relationship after years of strain over France’s role in the Rwandan Civil War and 1994 genocide.
Israel and Gaza militants may have agreed to end their latest flare-up, but without a political solution to the greater Palestinian-Israeli conflict, grassroots violence and miscalculations by factions on both sides could still escalate into another war.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Weeks Numbers
Review last weeks numbers here.
The S & P 500 was down 4 of the last 5 days, but we are still 10.64% up YTD. and only 1.84% below the all time high.
by Jill Mislinski
Earnings
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 21Q1 earnings are expected to increase 52.0% from 20Q1. Excluding the energy sector, the earnings growth estimate is 52.8%.
- Of the 476 companies in the S&P 500 that have reported earnings to date for 21Q1, 87.2% have reported earnings above analyst expectations. This compares to a long-term average of 65% and prior four quarter average of 76%.
- 21Q1 revenue is expected to increase 13.3% from 20Q1. Excluding the energy sector, the growth estimate is 14.2%.
- During the week of May 24, 15 S&P 500 companies are expected to report quarterly earnings.
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