“We should be careful that our benevolence does not exceed our means.”
This fall’s market rate increase currently underway has been accepted by investors with great calm, as equities are once again hovering close to all-time highs, despite a 10 year bond yield that has increased over 30 bps to almost 1.7% in the last three months as inflation appears to spreading across most of the economy.
With the longer-end of the curve still quite tame, it feels like the market still believes in the “transitory” nature of inflation pressures, as explained by the Federal Reserve.
The continued negotiation among Democrats in Congress and the White House for a massive spending bill provide an overhang that just may be about to play out before winter recess. On one hand, deficit spending can continue to provide an uplift to economic conditions, while on the other hand, the promise of increased taxes for corporation and the “wealthy” may cause a negative “wealth effect” that keeps a lid on asset prices.
For now, with earnings season half way completed, the market is taking its cues from corporate executives that seem optimistic for 2022, expectant of continued price pressures, but with an ability to pass such pressures down the distribution chain all the way to consumer.