Should investors prepare for higher inflation in the US?

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Should investors prepare for higher inflation in the US?

Investors bracing for higher inflation this year will on Wednesday receive the latest reading on US consumer price rises, amid signs that the country’s economic recovery is stalling. 

According to a consensus forecast compiled by Bloomberg, economists predict a month-on-month rise of 0.4 per cent in the consumer price index for December. On a year-on-year basis, they expect prices to have increased 1.3 per cent. 

Investors have accepted that economic growth in the coming months will be sluggish, especially with the surge in coronavirus cases globally and the tightening of lockdown restrictions. In December, the US economy shed jobs for the first month since last April.

However, vaccine breakthroughs and last week’s confirmation that the Democratic party will have sweeping control of Congress as well as the White House have revitalised bets that higher growth and, in turn, inflation are on the way. 

The wager rests on the assumption that a Joe Biden administration will sign into law a new stimulus package beyond the $900bn programme agreed at the end of last year.

Keith Wade, Schroders’ chief economist, reckons it could tally up to an additional $900bn in support, helping to boost economic growth by a full percentage point.

As forecasts have moved higher, so too have market measures of inflation expectations. The 10-year break-even rate, which is derived from prices of inflation-protected government bonds, recently climbed above 2 per cent for the first time since 2018.

The prospect of swifter price increases has hit US government bond prices particularly hard. Last week’s sell-off pushed the benchmark 10-year bond yield above 1 per cent for the first time in nearly 10 months. By year-end, many strategists believe it could reach 1.2 per cent or higher. Colby Smith

Can gold hit $2,000 an ounce?

Gold’s strong run into the new year fed expectations of another rally for the precious metal, following its surge to a record of $2,072 an ounce in August due to the economic fallout from Covid-19.

Last week, gold reached a two-month high of $1,959 a troy ounce, driven by rising inflation expectations — the metal is commonly used as a hedge against price rises — and the continued spread of coronavirus in major economies. 

But the rally then hit a roadblock after Democratic candidates secured victories in two crucial Senate run-offs, handing the party control of both branches of the US legislature. The resulting bond market sell-off pushed up yields, denting the relative attraction of gold, which does not provide investors with any interest. Gold ended the week at around $1,850 a troy ounce.

Still, analysts point to a number of reasons why gold’s run higher may resume. A Democratic-controlled Congress is expected to pass more spending and fiscal support packages that should feed through to inflation. That could increase appetite for gold. The dollar, which remains at its lowest level since April 2018, is also supportive of the commodity, making it cheaper to buy in foreign currencies.

“Price risk remains skewed to the upside in light of our expectations of further dollar weakness, negative real rates, inflation concerns and expectations of further fiscal stimulus amid accommodative monetary policy,” said Suki Cooper, an analyst at Standard Chartered in New York. Henry Sanderson

Will China’s exports continue to grow?

China’s trade dominance in the coronavirus era is set to be reaffirmed on Thursday with the release of export figures that are expected to show another strong month in December.

Economists polled by Bloomberg expect exports to have risen by 15 per cent compared with the same period a year earlier. In November they leapt by 21 per cent year on year — their highest growth rate since February 2018.

The country’s trade boom has arisen on the back of high demand for personal protective equipment as well as goods associated with working from home. This has come as other economies experience further lockdowns and surging Covid cases, slowing production.

Qu Hongbin, co-head for Asian economic research at HSBC, suggests that China’s export growth will remain strong in 2021 because “demand for pandemic products will slow, but overall consumer global demand should revive, with the latter effect far outweighing the former”.

HSBC estimates that a global recovery could add 7.2 percentage points to China’s export growth this year, against a 1.4 percentage point dip globally.

The growth in exports has persisted despite a strengthening in the renminbi, encouraged by the country’s recovery and foreign inflows into its markets. Last week, the Chinese currency rallied past 6.5 per dollar for the first time since 2018.

Imports data, also out on Thursday, are expected to show a 5.7 per cent year-on-year climb in December, according to Bloomberg, following a rise of 4.5 per cent a month earlier.

In September, imports into China increased 13.2 per cent on the same basis to hit $203bn — their highest ever monthly amount in dollar terms — as it ramped up purchases of iron ore, agricultural commodities and semiconductors. Thomas Hale

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