Re/De/Inflation: Elephant in the room.

1. The miss in the Sept job numbers has derailed the Fed tapering plan, the timeline will have to be rethought. But an interesting unsaid part of this number is the effect of the weekly unemployment benefits that would terminate this September. In states where the benefits had stopped some months back have seen stronger job gains, so thus now that the unemployment benefits would stop, the next couple of job reports would reflect the true picture.

2. 10-year real yield hit an all time low this week at -1.22%.

3. Loan to deposit ratio hit 4 decade low at 60% this quarter. Well, why wont this happen when the Fed is offering better returns on overnight lending. The wall of cash is going all going back to the Fed to earn the daily rate. This further goes to show the potential banks have when tapering starts and their net interest margins expand, this load to deposit ratios can mean revert.

4. We see a trend in Central banks owning a large pie of the public float of domestic govt securities. Bank of Japan ownership rose from 7.3% in 2009 to 48.4% in 2021. The ECB’s ownership of outstanding Eurozone government securities has risen from 2.3% at the start of 2015 to 37.7% at the end of July 2021. The Federal Reserve’s ownership of US Treasury securities has risen from 6% in 1Q09 to 22% in 1Q21

   1. This makes CB position even more critical in the STIR and money markets. CB portfolio has expanded to non conventional products.

5. The 5Y5Y inflation parameter becomes of paramount importance in times when the Fed bases its complete tapering plan on the long term inflation projections.

6. Inflation has become an important parameter in the eurozone as well. This week we hit the high in Forward inflation 5Y5Y swap rate at 1.72%. This is really painful for the long term g-secs. Financial repression has been operational in the Eurozone for a very long time.

7. The most important European elections are due in the next 24 days. The German government debt has expanded to 50% of GDP, and with elections around the corner, I would expect them to load more debt and thus that would make it breach the 60% critical mark. After which the German govt bund yields can ride rapidly, so I would clearly short the front end.

8. It should be noted that between 2010 and 2020, inflation averaged just 1.7% per year and still amounted to an 18% erosion of the dollar’s purchasing power over the decade. If inflation averages 7% in 2021, peaks at 10% next year and falls to, say, only 4% in 2023 and 2.5% in 2024, it would still imply that the dollar could lose almost 25% of its purchasing power by the end of 2024.

9. The recent employment numbers reflect something amazingly terrific: the main engine of the US job growth, the hospitality and leisure sector, added no jobs in August.

10. Interesting Charts: