On Dec. 11, 2020 the U.S. Food and Drug Administration granted approval for the first vaccine for COVID-19. As of January 26, nearly 24 million doses have been administered in the U.S. Despite these positive developments, the economic data points have yet to show much improvement.
During this same time period, the U.S. yield curve has steepened significantly, leading some to believe that the market is anticipating a robust recovery as early as the spring. Bob Iaccino, veteran trader and chief market strategist for Path Trading Partners, cautioned that there may be a secondary message that the yield curve is signaling when he noted, “the yield curve is still the best predictor of coming inflation.”
CME Group senior economist Erik Norland expressed a more optimistic take when he said, “I believe 4% GDP growth estimates are conservative” and that “there is a lot of pent up demand and still enormous amounts of stimulus in the system.” Could markets be signaling upcoming growth or a period of inflation? Or both?
Three-Pronged Growth Ahead?
It’s not hard to imagine a scenario in which three major economic factors meet simultaneously to push growth far beyond what has been estimated. The trajectory of vaccines administered continues to gain momentum as more supply and additional vaccines gain approval. This could coincide with the normal economic boost that typically occurs with the start of spring. Add in the potential for additional government stimulus and increased Federal Reserve accommodation and we could potentially have a recipe for explosive growth. Of course, nothing comes without a cost, and this scenario also comes with potential of inflation.
As Norland pointed out, rising prices in copper, lumber, gold and silver are flashing clear signs of inflation. The word “unprecedented” is used frequently when describing our current situation, but it remains the best adjective.
These are clearly uncharted waters as we emerge from the pandemic’s economic destruction. There’s no doubt that the memory of pandemic will linger for years to come. The most important economic question is how quickly can the American consumer and corporate sector return to something resembling normal? The coming weeks and months have the potential to bring some of the most critical economic data we’ve seen in decades.
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