Coronavirus has been dominating both social and political life and events on the capital markets for more or less the last twelve months. At around the time Covid reached its sad first anniversary, stock markets received a further shock when the spectre of inflation, long thought vanished, ghosted across trading floors again. There it made its malevolent presence felt, triggering a sort of chain reaction as thoughts of rising prices stirred up concerns about an abrupt end to looser monetary policy. These in turn led to sharp downturns on bond markets. The other side of this particular coin was the tightening of yields across a broad front. The mainstay here is the USA, where the 10-year Treasury is, at just under 1.60%, returning more than it has done in over a year. Although the Swiss federal bond of the same term remains resolutely below zero, over the course of the last year its yield has climbed by just under 29 basis points to reach -0.24% (see graph).
Consumer price indices, regarded as a central barometer for measuring inflation, have shown a moderate upward trend of late. Taking the eurozone as an example, from August to December 2020 consumer prices in the currency union remained below the figures for the same period the previous year. In the new year, though, the value of the basket of goods analysed by Eurostat reached the level last seen in January and February 2020. In the USA, too, the upward pressure on prices subsided sharply during the peak of the coronavirus pandemic. Since then, however, the Bureau of Labor Statistics has recorded a return to more pronounced inflation for the world's largest economy. Graph 2 shows that consumer prices indices have nevertheless trended well below the level targeted by central banks. Both the European Central Bank (ECB) and the US Fed work towards a target of around 2%.
Despite the existing discrepancy, monetary watchdogs on both this and the other side of the Atlantic obviously felt compelled to comment on the latest developments on capital markets. At an online event held by the Wall Street Journal, Federal Reserve chairman Jerome Powell said that the surge in yields had caught his attention, but that he did not see conditions in the market as "disorderly". In Powell's view, a recovering economy could "create some upward pressure on prices." He cited as the trigger the wave of consumer spending that would come after the pandemic had ebbed. Since this is likely to be a one-off effect, though, Powell does not expect the pressure on prices to be more than transitory. The Fed boss reaffirmed the ultra-loose monetary policy, stating that the central bank would not act hastily even if the upturn on the labour market endured. "I expect that we will be patient," Powell added. Similar noises have been coming from the ECB tower in Frankfurt, with the European Central Bank promising to continue to ensure favourable financing conditions.
It remains to be seen whether the monetary authorities can stop the latest rise in yields with this attitude. At any rate, they appear to be taking the upturn in prices happening outside the consumer price indices in their stride. Inflationary tendencies are becoming apparent across a wide range of assets, with securities (bonds and equities) being just as affected as tangible assets (property and commodities). As consumer prices have also begun to show flickering signs of life, now could be the right time for investors to devote greater attention to maintaining their purchasing power. Gold and property have always been regarded as tried and tested tools in this regard. "However, they are not the only safe havens to which to steer at times of inflationary turbulence," according to the strategists at Swissquote. Indeed, they advise having a diversified exposure to both tangible and intangible assets. This assessment has led to the creation of the Swissquote Inflation Index. In keeping with the current environment, the new benchmark comprises a broad mix of assets which will enable investors to face up to the spectre of inflation.
Source: SNB, Thomson Reuters Historical data are not a reliable indicator of future performance.
Source: Statista, Thomson Reuters, USA: Figure for February 2021 = consensus estimate Historical data are not a reliable indicator of future performance.
