Aquila Flash weaker labor market data

New virus variants will continue to prevent a complete opening of the global economy. Europe's vaccination gap to the US has narrowed considerably. Inflation risks are high. A scaling back of highly stimulative monetary policies is not yet in sight. The recovery of the US labor market is slower than “the consensus” expected. Although more than 7 million jobs have been lost since the start of the pandemic, US wage inflation looks set to rise. The coming rise in consumer price inflation will be less transitory than central banks would have us believe.

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Aquila Flash higher US inflation

Vaccination campaigns are being implemented at speed in most Western nations and lockdown measures are being scaled back. There is a risk that the jump in US inflation will not be just temporary. But the US labor market is still too weak for an inflation explosion. The latest US economic figures were disappointing. Central banks, like most other investors, are investing pro-cyclically and have increased their quotas for “investments” in risky instruments. Many central banks intend to hold less US dollars and more "other currencies" in their reserves.

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Aquila Flash US infrastructure package

The rise in interest rates at the long end of the yield curve has come to a halt for the time being. This probably reflects the view that the Biden Administration's infrastructure package will be financed primarily through tax increases. If implemented, the Administration’s plans would significantly worsen the international position of the US from a tax competition perspective. The good sentiment indicators in the US are due to booming stock markets. Never before have the real economy and stock markets been as linked as they are today.

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Update February 2021

Long-term interest rates have risen sharply in recent weeks. There are 3 reasons for this: 1. due to the strongly rising government deficits, more and more bonds have to be placed with investors 2. the prospect of an end to the quarantine measures and a strong economic upswing reduce the demand for government bonds 3. rising inflation expectations. Due to the enormous debt and highly valued equities and real estate, the rise in interest rates must be slowed down. We expect the FED to take further measures soon.

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February 2021

Large government rescue packages are straining the capacity of bond markets to finance them. Central banks have delivered a gigantic increase in the money supply which has caused a rise in inflation expectations. Nominal interest rates on longer-term bonds have risen more than inflation expectations, leading to higher real interest rates. Given that equity and bond markets are highly valued, investors must monitor developments closely. We expect central banks will soon become even more active in combatting the rise in long-term interest rates.

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January 2021

In 2021 the world will get vaccinated. The second half of the year should see the start of a strong economic recovery. Democrat election victories in Georgia should result in a significantly more stimulative fiscal policy. However, expectations of a $3,000 billion package seem exaggerated due to the minimal Democrat majority in the Senate as well as the presence there of some centrist, traditional Democrats. Sooner or later, the Fed and other central banks will probably have to fight a too-rapid steepening of the yield curve in order to ensure the sustainability of government debt levels.

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