Friday 4, February 2022

Wrap

Non-farm payrolls were 467K last month. This was huge compared to expectations (although the range of guesses was huge) of 150K. This turobcharged oil, up about 4% this week alone and juiced bond yields. The 3M rate implicit in eurodollar futures shot up 8bp. Longer-dated bonds responded at last: the 10Y also went up 8bp.

This wonderful interview with Rahuram Rajan really got me thinking about inflation. Rajan commented that inflation was everywhere an always an expectations phenomenon. So many countries, e.g. most of Latin America, have never escaped endemic inflation, and yet Japan has never managed to slay the beast of deflation. Why is this? Expectations!

Once workers decide that their wages will be worth x% less in a year’s time, they’ll force the hand of employers, especially the biggest employer of all, and the price setter of labour in much of the economy, the government. Jacking up interest rates to slow down construction etc. could work, but the political fallout is now close to unbearable. Listen to the episode, but essential point is that there is so much debt and QE in the economy now that there is no way to unwind it without catastrophic consequences other than letting inflation painlessly wash it away.

It might be a year or five, but at some point we will see inflation become unanchored. Well, that’s my guess, for what it’s worth.

Probably, for a while, inflation will be good for equities, but not forever. Nobody cares about bondholders.