Are we living in a MMT world?

1. The rampant spread of the delta variant of the virus may challenge the economic recovery in many countries. We see a stark difference between the vaccination rates in developed countries and those in developing countries. This divergence can further be observed in their reopening stance and industrial activity rebound.

2. With the Fed meeting close now, the market is contemplating rate cuts as the economic growth has peaked and the economy has overheated. 10Y USTs have moved below 130 bps, lowest in over the last 4 months. Analysts expect the rate cuts to come sooner than was signaled by the Fed. On the flipside, the Fed is comfortable with the inflation exceeding the target 2%. Even the ECB in the latest meeting said that they were comfortable with inflation overshooting target and would be wary of premature tightening.

3. With restrictions lifting across cities and industries, roads are again loaded with cars. There is a resurgence of bookings for tech startups that help people find parking slots.

4. With mixed signals from different parts of the world about reopening and virus containment measures, markets are now striking arrows in the gray zone. Stock prices for companies expected to make the most of the post covid windfall gains are considered to have peaked. UST 10Y also peaked at 1.74% and now investors are flocking back again to the havens, with the treasury yielding around 1.3%. All this is happening at a time when corporate America is reporting record breaking quarterly performances across the sectors. We also observe that US personal savings rate has increased to 5 times its pre pandemic average. Because of the colossal stimulus packages, investors are sitting with huge stockpiles of cash. Now we wait and watch where does this all flush?

5. Are we living in a MMT world?- Wall street believes that the policy makers are practicing MMT for good or for worse, but the economists and policy makers censure this argument.

   1. Economists think it is okay to have large budget deficits in times when we know the nature of the crisis is transitory.

   2. The real risk with copious stimulus money is the potential supply bottlenecks that may lead to higher prices.

6. Asset managers such as BlackRock and JPMC are bullish on the economic recovery and see that the recent rise in cases due to the delta variant may dampen but not derail the recovery trajectory. They target the treasury yields again topping at 1.8% by year end.