Predicting thoughts of institutional investors and Fed
I see many people say on internet that the market is highly volatile and very hard to predict the trend.
In my opinion, institutional investors (even including Fed) have different thoughts about where the economy is heading due to uncertainty.
So, I want to guess what they are probably thinking so that it may give us some clues why the market is acting in this way. (sorry for my poor english)
(1) There are people who think there will be inflation, while others not.
Covid case/death is decreasing in US, UK, Japan, and Germany. This makes us think that the economy is recovering and will lead to inflation, resulting in recent high US10 yield. However, Gold price keeps decreasing. Some probably think that investors are selling Gold (no interest) and buying bond (have interest). Maybe right but maybe not. Gold is hedge asset for inflation (obvious if you compare Gold price vs inflation in the past). Because Gold price keeps decreasing, it means some people think there will be no inflation.
(2) Markets have reflected positive news (decreasing covid case/death, start vaccines, etc).
But have markets reflected any negative news yet? When the economy starts to recover, there will be change in fiscal policy (gov stimulus, investment..) and monetary policy (no more easing) and creditors will collect from companies/individuals liabilities (debt, loan, etc) which have been extended due to the covid. Markets, especially S&P500, will possibly go down sharply when starts to reflect negative news. Maybe, there will be deflation first, then high inflation later. The worst case is stagflation. Who knows. There are many possible scenario.
(3) Fed will possibly try to decrease long-term bond yield.
Even though Powell said he focuses on labor market and stable inflation, long-term bond yield is high (even Fed governor/economist Brainard said she was shocked). If yield keeps increasing, Fed will possibly try to decrease yield by purchasing long-term bond.
Please let me know if you have the same opinions or different ones :)
In my opinion, institutional investors (even including Fed) have different thoughts about where the economy is heading due to uncertainty.
So, I want to guess what they are probably thinking so that it may give us some clues why the market is acting in this way. (sorry for my poor english)
(1) There are people who think there will be inflation, while others not.
Covid case/death is decreasing in US, UK, Japan, and Germany. This makes us think that the economy is recovering and will lead to inflation, resulting in recent high US10 yield. However, Gold price keeps decreasing. Some probably think that investors are selling Gold (no interest) and buying bond (have interest). Maybe right but maybe not. Gold is hedge asset for inflation (obvious if you compare Gold price vs inflation in the past). Because Gold price keeps decreasing, it means some people think there will be no inflation.
(2) Markets have reflected positive news (decreasing covid case/death, start vaccines, etc).
But have markets reflected any negative news yet? When the economy starts to recover, there will be change in fiscal policy (gov stimulus, investment..) and monetary policy (no more easing) and creditors will collect from companies/individuals liabilities (debt, loan, etc) which have been extended due to the covid. Markets, especially S&P500, will possibly go down sharply when starts to reflect negative news. Maybe, there will be deflation first, then high inflation later. The worst case is stagflation. Who knows. There are many possible scenario.
(3) Fed will possibly try to decrease long-term bond yield.
Even though Powell said he focuses on labor market and stable inflation, long-term bond yield is high (even Fed governor/economist Brainard said she was shocked). If yield keeps increasing, Fed will possibly try to decrease yield by purchasing long-term bond.
Please let me know if you have the same opinions or different ones :)