Wednesday's Market Minute: It Still Doesn't Pay to Save

The U.S. stock market rally is showing signs of short-term exhaustion, drifting back from record highs, but catalysts remain mostly bullish. So far, the FOMC taper announcement did not trigger a tantrum that many analysts suggest will eventually cause a meaningful correction. Earnings season is winding down and corporate profits were generally favorable considering pricing pressures. Recent ISM reports suggest that global supply chain pressures remain and that inflation will remain elevated. Equity investors will be fixated over the upcoming inflation report, which could possibly show the fastest increase since 1990. Surging energy costs, persistent supply chain issues, and rising labor costs could have the CPI report run hotter-than-expected despite the PPI numbers generally coming in yesterday according to consensus.

Consumer price inflation has been running at 5% or more on a year-over-year basis since May, triggering a debate about whether the Fed will change its view of the situation as a transitory effect of pandemic-related disruptions. Despite persistent inflation for the greater part of the year, moves in the interest rate market suggested that investors were not too worried about elevated price longevity. Secular disinflation is expressed by longer-dated Treasury yields, which typically rise with inflation expectations as price pressures erode the value of the debt. However, the 30-year Treasury yield dropped to its lowest level since July, down to 1.82%.

The FOMC continues to maintain a dovish stance on raising the overnight funding rates as the labor market has yet to achieve its maximum production potential with GDP still running below trend. If the steep year-over-year rate change in inflation begins to show signs of easing, then the FOMC could be declared sensible to wait on nudging rates higher, which could have disrupted an economy and market that continues to impress. Low rates and higher-than-expected inflation have been a generous combination for owners of investable risk assets, seeing as how the Fed has facilitated a monumental wealth transfer. The demand for investment has been high because of low funding rates, which comes at the expense of conservative savers and those invested in the frontier of low risk and return, such as government bonds.

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