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THERE IS A GROWING SENSE THAT THE WORLD IS “GETTING BACK TO NORMAL,” AND WHAT A RELIEF IT IS! WE SEE MORE PEOPLE VENTURING OUT, DINING AT RESTAURANTS, STAYING AT HOTELS, RETURNING TO THEIR NON-HOME OFFICES, AND MORE. Unfortunately, many countries are still dealing with more contagious and virulent mutations of COVID19 and lower vaccination rates. But in aggregate, the global economy is recovering with the aid of accommodative fiscal and monetary policy, supporting the strong performance of risk assets and the continued rotation from growth to value.
Inflation is the bogeyman now. US inflation leapt 5% in May from a year earlier, well above the Federal Reserve (Fed) forecast for 2021. “Transitory versus persistent” was the central debate at the June Federal Open Market Committee meeting, with recognition of the upside risks to inflation accelerating the Fed’s tightening path from zero rate hikes in 2023 to two anticipated hikes in 2023. Even though the market has priced in earlier hikes, the Fed’s base case is that temporary factors and base effects are still distorting inflation prints. We see an elevated risk that supply/demand imbalances in labor and commodity prices may become more persistent. In housing, for example, structural drivers are contributing to higher prices and could feed into…
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