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Inflation pressure to spill over into the U.S. financial market

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Rent hikes in the U.S. are likely to contribute to inflation pressure, which will impact the financial markets.

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The Financial Times (FT) reported that Dan Ivasin, chief investment officer of Pimco, one of the world’s largest bond funds, issued the warning.

Currently, inflation in the U.S. is caused by a temporary contraction of the supply chain following the Covid-19 pandemic, and it is different from the Federal Reserve’s (Fed) optimism that it will soon return. “There are a lot of uncertain factors in inflation,” Ivasin told the FT. “Pimco also keeps a close eye on the relationship between house prices and rents, while the baseline scenario is that the current inflation will be temporary.”

In the first half of this year, home prices hit a 30-year high, and rents are also rising. After the pandemic, telecommuting has become increasingly popular, and big-city residents who want to move to a midlife-friendly suburban area are seeking housing. According to a US Census Bureau survey, as many as 15 million Americans are at risk of being evicted for failing to pay skyrocketing rents in the future.

Pimco warns that rents can affect inflation. As a result of the buoyant U.S. housing market and the rise in home prices and rents, investors are concerned about “sticky inflation,” and as a result, U.S. 10-year Treasury yields are higher. Treasury note rates could once again rise to 1.75 percent. Earlier this year, the yield on the benchmark 10-year U.S. Treasury note reached 1.75 percent at the end of March. Since then, however, it has found some stability and has recently been at the 1.25% level.

Ivasin predicted, however, that Treasury yields would only experience excessive jumps if inflation keeps rising, as the Fed is likely to tighten if inflation persists.

“The Fed will act if it determines that expected inflation has crossed the appropriate line,” he added.

As a response, Pimco anticipates the Fed will announce a “tapering” plan to gradually reduce its monthly bond purchases by $120 billion per month later this year and implement it in January of next year.

Russian policy tightened earlier than in the United States, however, due to concerns about prolonged inflation. According to Russian Central Bank (CBR) Governor Elvira Nabulina in an interview with the Financial Times, the sharp rise in food prices has “thrown off” the inflation expectations of ordinary Russians.

After the COVID-19 pandemic, Russia was one of the first countries to tighten monetary policy.

Rates have been raised four times since March, including a 1.0 percentage point hike in July.

In response to the pandemic, Russia also lowered its benchmark interest rate to an all-time low last year. However, before the September elections, sharp increases in interest rates were implemented due to rising inflation.

For MetaNews.

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Jonathan Hobbs

Jonathan Hobbs is an Australian investor and author that trades on a variety of asset classes, including currencies, equities, and commodities. Jonathan’s experience as a macro trader leverages his unique writing style to combine important elements, such as technical analysis and news. The other elements that he brings into his unique writing styles are foundation analysis aimed at rational equilibrium values, evaluating the sizes and motivations of buyers and sellers, as well as identifying the needs of the buyers and sellers in the individual markets. Jonathan is committed to quality writing for new traders as well as veterans.

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