Wall Street cop Ed Yardeni is expecting inflation to make a comeback.
Yardeni predicts that current market conditions will depress the benchmark yield for 10 year Treasury bills between 2.5% and 3% over the next 12 to 18 months.
“”[It’s] That’s not enough to really weigh on the economy or the stock market, “the president of Yardeni Research told CNBC’s” Trading Nation “on Friday.” It is not a misfortune. It’s not a disaster. In a sense, it is the bond vigilantes who signal inflation concerns. “
Yardeni coined the term Bond Vigilantes in the early 1980s to describe investors who want higher yields on government bonds to offset rising inflation.
In this case, bond vigilantes are responding to trillions of dollars in coronavirus supplies pouring into the economy. They are skeptical of Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen that inflation will be temporary.
Yardeni is currently in the interim camp.
“Most of the problem would be due to the so-called comparison effect, where we compare inflation in terms of price levels to that of a year ago and the price level has been depressed a year ago,” he noted. “If we reach 2.5% year-on-year in the coming months, even higher numbers say 2.8%, it would be correct to interpret this as a sign of how prices were a year ago rather than income.” from inflation. “
The street breathed a sigh of relief on Friday when key economic data showed tame inflation. Core spending on personal consumption increased 1.4% year over year versus the consensus estimate of 1.5%. The 10-year rate of return has been reduced to 1.67%.
Yardeni calls the results backwards.
“We need to get the numbers for March, April and May to get a sense of how inflation is playing out as a result of the aftermath of the pandemic,” said Yardeni, who for decades worked on strategy for walking on the streets for companies like Prudential and Deutsche Bank.
Although he currently sees inflation as the biggest market risk, he believes that increasing productivity and technological innovation will play a major role in lowering cost pressures.
“We have an economy that is hot and it’s getting scorching hot because of the stimulus checks that are now being deposited on people’s accounts,” he said. “In that case, I think the earnings will be fantastic.”
His S&P 500 year-end target is 4,300, up 8% from Friday’s close of trading. There are 4,800 in 2022.
“If we get into the fall and then later in the year and inflation is still stubborn and at 2.5 [percent] and actually going higher then I think we have to consider the possibility that we might have more problems than expected, “said Yardeni.
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