#CPI

February was a month of two halves. Hawkish central banks, high inflation and a strong U.S. jobs report dominated the first half of the month. However, the Russia/Ukraine situation has taken over the narrative for the second half of the month and has carried over into March. Our hearts and prayers go out to the people of Ukraine.

Here are 3 things you need to know:

1. Real gross domestic product (GDP) for all of 2021 grew by 5.7%, compared with a contraction of 3.4% in 2020, when the pandemic set in.
2. The growth outlook remains strong even after factoring in the expected pace of Federal Reserve rate hikes, with the labor market providing ample evidence of strength.
3. The Consumer Price Index in the United States rose by 7.5% in January compared with January 2021, the largest such increase in 40 years. Inflation should peak in the first half of 2022.

Sources:

1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
2. Indices:
   • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
   • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
   • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
   • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Do you have excess cash reserves that you won’t need for 12-months? If yes, then consider Series I savings bonds. These bonds pay a fixed rate for the life of the bond (today it is 0%), plus the annualized Consumer Price Index (CPI) inflation rate. With the interest compounded semiannually, these I Bonds will pay a total annualized interest rate of 7.12% through April 2022, well in excess of any other safe yield obtainable (*see below on liquidity constraints). If inflation rises, the rate will go up when it resets in April. The bonds also protect against deflation: the overall rate on the bonds can never fall below zero. A win-win scenario.

In addition, the interest on an I Bond is exempt from state and local income taxes, and if you use the proceeds for qualified higher-education expenses, the interest is exempt from federal taxes as well (*income restrictions apply). Interest is deferred until the bond matures or is cashed in and you don’t pay federal taxes until you redeem the bond.

Maturity takes 30 years, and you must hold a Series I bond for 12 months, but you can cash them in after one year with a small penalty and after five years without any penalty. 

You can buy up to $10,000 per person per year directly from Treasury Direct. Couples can use a year-end strategy to bring their holdings to $40,000, with each spouse buying $10,000 in December and another $10,000 in January. Another $5,000 in I Bonds can be purchased with an income-tax refund.

Source: https://www.wsj.com/articles/treasury-has-a-i-bond-bargain-inflation-stocks-interest-rates-rebalancing-investment-11639586799?st=wmrzg5ujzlc9hlp&reflink=desktopwebshare_permalink

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

By:  Thomas Steffanci, PhD, Benefit Financial Services Group

The past two weeks saw some eye-popping inflation readings. The consumer price index (CPI) for April came in at 4.2% year-over-year (YoY), but a surprisingly large 0.8% month-over-month (MoM) gain. The producer price index (PPI) was also hot, coming in at 6.2% YoY and 0.6% MoM.¹

The Federal Reserve has been telling anyone who would listen for the past several months that transitory inflation outbursts were to be expected, caused by pent-up demand, relaxed Covid restrictions, the stimulus, and temporary supply constraints. These would not move the Fed to begin to withdraw their liquidity provisions to the economy, as employment was still far below its pre-pandemic level.  Several Fed speakers went on record with saying as much…and again after the inflation reports.

But to listen to Wall Street, these numbers will pull the Fed forward in their timetable to begin to withdraw their support by reducing their purchases of Treasury and mortgage securities. For years, Wall Street has had an imbedded ‘recency bias’, meaning giving the most importance to the most recent event. So, you would have thought that market prices of stocks and bond yields would have reacted to the these “shocking” readings by reacting negatively as horns blew and whistles sounded.

Well, that is not what has happened. The futures markets for bonds and Treasury bills barely fluttered. More importantly, stocks and bonds in the cash market reacted positively since the May 12 inflation news. Ten- and 30-year bond rates have fallen 10 basis points since then. And the Nasdaq gained 4.8%, and the S&P 500 has risen by 3.4%.^2,3

So why did this happen? As always, the devil was in the details which are frequently ignored by the headline grabbing talking heads. Goldman Sachs in a recent report went behind the numbers to ferret out the details. Here’s what they found:  90% of the CPI increase was accounted for by reopening price rebounds and supply disruptions. By far the largest contributor to the price rise in that category was used car purchases as new car sales were disrupted by parts shortages. The other large contributor was transportation services, chiefly airline ticket sales. All the other categories (core services) barely budged. And add to this that the year-to-year comparison period was March 2020 where prices actually fell, so you have a distorted picture of the importance of the April CPI.

What do we take away from all this? Two things. The market saw through the fog of the headline inflation numbers so don’t listen to the noise of the moment. And second, all this tells us is that the market…maybe…just maybe…is starting to believe the Fed when they say they will continue asset purchases for “some time” and that liftoff for the Fed Funds rate will not start until the second half of 2023. Of course, several like-sized increases like April’s during the next six months could move the needle closer. But not now.

1. Source: www.bls.gov
2. The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market.
3. Source: Morningstar.com

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.