Pay close attention to inflation risks

So far this year, the stock market has performed well. As expected, the focus is mainly on companies that will recover substantially after their operations are closed or severely damaged by anti-epidemic measures.

The fund has remained quiet, with little trading volume, and has made moderate upward progress. Its general index investment has outperformed last year’s brilliant digital and green technology professional fields.

The topic suddenly is, when will the central bank reduce its appetite for government bonds and reduce money creation? When might they even risk raising interest rates slightly?This Central bankLed by the Federal Reserve, they have made it clear that they believe the current rise in inflation will prove to be temporary.

They plan to stick to the policy of printing more bonds and keeping the bonds expensive. They hope to keep interest rates very low to ensure that this recovery is stronger and more durable than in 2010-12 after the 2008-9 global financial crisis.

The Bank of England and the Bank of Canada have fallen apart and announced a slowdown in their quantitative easing program. The Bank of England assures us that this will not gradually decrease. It insists on the previously approved fixed number of bond purchases and will continue it until the end of this year, and needs to reduce purchases every week. No agreement was reached on any extension of the plan after December. In fact, this is not so much a gradual reduction, as it is an end.

Moving in the same direction is the Bank of Canada, which has announced that it will reduce its purchase plan by a quarter. It is even willing to consider raising interest rates, even if the magnitude is small, and it may appear in the future.

Other central banks are obviously more concerned about the speed and durability of the recovery.

European Central Bank Commitment Increase bond purchases Because it is still worried about the slow EU vaccination plan and the continued impact of the pandemic on the euro zone economy. In practice, its bond purchases have not changed much.

Although there are clear signs that the U.S. currency is growing much faster than other major economies, and there are good signs of economic recovery, the Fed still firmly stated that it will stick to its large-scale purchase plan. Strong economic recovery.

After initially vacillating due to inflation concerns, the market seems to have accepted this so far. The Fed is leading the way in price increases, claiming that there are some clear shortages of raw materials and commodities (such as semiconductors), which will push up prices in the short term, but will be corrected by increasing production capacity in due course.

Officials said that inflation expectations are still well anchored. They hope that the US economy will heat up and the inflation rate will be slightly above 2% for a period of time. Those worried about inflation point out that wages appear to be rising due to government policies and the need for service companies to re-employ.

The United States has also increased the payment to the unemployed by $300 a week this summer to give them more bargaining power on wages in order to make the work more valuable, although not all states are implementing this measure.

Everything seems to be ready for a strong recovery in the United States. The Eurozone should also see considerable growth, although its vaccine progress has been slower than that of the United States.

What we need to consider now is whether we have seen the stimulus peak? It seems unlikely that any major central bank will announce a larger plan, and some central banks will allow their plans to terminate or become invalid. The EU is also unlikely to announce any further fiscal stimulus measures.

President Joe Biden started his political discussions with Congress with a huge request, seeking his American Family Plan And his infrastructure plan as part of next year’s 6 trillion US dollars expenditure.

Most American commentators think this will be cut. This is too high for the taste of Republicans, and it seems unlikely that the two parties will reach an agreement. Even if it is to be passed by the Democratic Party, some adjustments may be needed because the party’s power is excessive.

The president needs to be careful. Aiming at excessive spending targets and budget deficits may make bond investors worry about how easy it is to finance all of this. If there are too few goals, Biden’s left will be unhappy. If the Fed continues to go all out, it will find it difficult to eliminate inflation once it triggers.

So far, the market believes that the sharp rise in the prices of oil, steel, wood, construction materials, electronic chips, copper and other basic commodities reflects the short-term shortage will be eased, and accepts the view that wages and other prices will continue to be restricted.

This creates good prospects for stocks based on substantial profit growth and economic recovery. If we see signs of rising wage inflation or expect further increases in inflation in the future, we should expect the central bank to be forced to retreat.

As the authorities return to the 20th century’s priority of squeezing demand to control inflation, this will be a less friendly policy background for financial assets. If anything goes too far, it is the United States, the leader of the global stock market.

In this uncertain period of bonds and inflation, I kept a large amount of bond funds in cash. If the Fed starts to lose control of the argument that inflation is only a temporary spike, I also need to consider some reductions in the exposed stock market.

Sir John Redwood is Charles Stanley’s chief global strategist. FT Fund is a virtual investment portfolio that aims to show how investors can use a wide range of ETFs to access the global stock market while reducing investment costs. [email protected]

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