The renewed mojo for the reflation trade follows Powell’s reaffirmation this week of the central bank’s intention to let the world’s biggest economy run hot for some time as it recovers from the pandemic.
A key bond-market proxy of inflation expectations for the next decade just hit the highest since 2013, and cash has been pouring into the largest exchange-traded fund for Treasury Inflation-Protected Securities.
The Fed is stressing that inflation’s upswing “is transitory, but we likely won’t have better clarity on this assertion until this initial economic wave from reopening has subsided,” said Jake Remley, a senior portfolio manager at Income Research + Management, which oversees $89.5 billion.
The measure has roared back from the depths of last year, when it dipped below 0.5% at one point in March.
“We want it to average 2%,” Powell said this week regarding the inflation benchmark the Fed targets.
However, Powell reiterated this week he sees the move as part of an overall trend of one-time price increases as the economy re-opens.
Next week is also expected to bring another robust jobs report, with forecasts calling for the second straight month of gains exceeding 900,000.
Bond traders have another big event on their radar next week.
However, many firms say the Treasury is poised to begin whittling down its note and bond sales later this year as funding needs have peaked.
The economic calendar:May 3: Markit U.S.
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