Falling breakeven rate: inflation is falling: key indicator points to imminent stock market rally | message
• Breakeven rate indicates falling inflation
• Stock market ahead of rally?
There has recently been great fear among market participants that inflation could slow down the economic recovery. In the past month, however, inflation worries have subsided somewhat, as reported by CNBC. This can be seen by looking at the breakeven rate, a popular measure of the market’s inflation expectations. The breakeven rate describes the difference between the yields on government bonds and inflation-linked bonds with the same maturity.
Breakeven rates suggest recovery
The 5- and 10-year spreads are usually considered. After these rates rose to their highest level in about eight years in May of this year, they have fallen continuously since then, according to CNBC. Investors no longer assume that inflation will continue to rise at such a rapid rate. While the 5-year breakeven rate is currently 2.45 percent, the 10-year breakeven rate is 2.33 percent – so the markets expect inflation to decline in the longer term.
“To us, this signals that markets are beginning to give up the idea of structurally higher US inflation. Looking into the second half of 2021, this could be the most important data point to watch,” CNBC cited Nick Colas, co-founder by DataTrek Research. The Fed is also convinced that the current wave of inflation is “temporary”.
Inflation remains an issue
In any case, inflation remains a topic that is often discussed in the market. Mohamed El-Erian, Allianz’s chief economist, continues to worry because if the Fed falls behind the inflation curve, it could be forced to Monetary policy tighten quickly, which could ultimately result in a recession, as CNBC recounts El-Erian’s concerns.
“When inflation expectations pick up again, markets will rightly be concerned about whether the Federal Reserve will have to raise rates sooner. If they continue to trend lower, then market expectation is one Rate hike A safe assumption in 2022, “said Colas of DataTrek. However, he was confident that stocks should benefit in the near future, with the energy sector and financials in particular showing promise.
Finanzen.net editorial team
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