Are things like inflation and rising bond yields really a concern for the market? Commodity prices keep surging, inflationary pressures are evident and the vast increase in money supply provides the ammunition. Average inflation targeting by the Fed provides the necessary context. PMIs last Friday pointed to higher inflation coming through. Substantial price increases for inputs such as PPE led to the fastest rise in “cost burdens” since October 2009, when the index started. Moreover, strong demand allowed firms to pass on the cost increase by raising selling prices. The rate of inflation in what firms charge customers was the second-fastest on record (behind only November 2020). In the UK, the composite PMI showed that “cost pressures intensified across the UK private sector during February”. Yields on government bonds continue to march higher. US 10-year Treasuries trade close to 1.4%, a year high. The spread between 2s and 10s is at its widest in four years at 1.28%, whilst the 5s30s spread is at a 7-year high at 1.57%. UK gilt yields are at year highs above 70bps and 2s are at their highest since April suggest the market doesn’t think the Bank of England will go for negative rates. 

If the Fed is worried about inflation and rising yields, this week’s round of speeches provides the ideal time to push back. I don’t expect they will – the Fed explicitly wants the economy to run as hot as it can to get employment back to 2019 levels. But that’s why inflation expectations can become unanchored. Powell delivers his semi-annual testimony to Congress this week, whilst Richard Clarida has two speeches on the economy and monetary policy. Lael Brainard and Michelle Bowman are also slated to speak this week. I think the Fed speakers will stress both transience of inflation hikes and that policymakers are comfortable with above 2% prints (AIT implies this anyway). We know where policymakers sit on this. Treasury Sec Yellen last week said the price of doing too little is “much higher” than doing too much. Anchors are being slipped.

European markets sold off early on Monday, with the major bourses falling around 1%. Inflation and yield concerns may be the driver but the move seems a little overcooked. Investors are starting to show their worry about yields – TINA is no more. The question is more of allocation and small caps vs large caps. Oil trades a couple of bucks off its recent year high, gold has made a decent fist of a rally off the key support at $1,763 to reclaim $1,790, whilst the dollar rose in early trade and GBPUSD was just a little under $1.40. Copper prices slipped but remain above $4 and fundamentals continue to support with a sharp deficit seen this year. 

UK prime minister Boris Johnson will set out the road out of lockdown tonight – except most of it has already been leaked to the press so we know the major steps. Schools first, pubs last. Perhaps that is fair, but we can argue the caution will make for a slower recovery this year than it might be.

Bitcoin hit a fresh record on Friday with its ‘market cap’ [total coins in circulation x price] exceeding $1tn for the first time. Prices gapped higher over the weekend towards $58k but has since pared gains to trade around $56k this morning. Elon Musk said prices seemed ‘too high’. Wags will note that Musk tweeted “Tesla stock price is too high imo” in May 2020 – and we know what happened to the shares since then. His decision to invest $1.5bn in Bitcoin has provided the keystone for near-term constructive view on Bitcoin, building on the gains made since the PayPal move last year.  

It’s been a heady few weeks as we have seen a slew of corporate and institutional support feed through into higher prices. In addition to Tesla, BlackRock has “started to dabble [in Bitcoin]”, long-time gold bull Jeffrey Gundlach of DoubleLine Capital is backing Bitcoin as the asset to insulate investors against the great monetary inflation, Microstrategy is issuing $600 million of senior convertible notes in order to buy more Bitcoin, BNY Mellon became the first big national custodial bank to offer custody services for crypto assets, and Mastercard said it will start supporting some cryptos this year.  

It should go without saying that new investors to Bitcoin should be prepared for a major volatility and for prices to drop suddenly and as sharply as they have risen. We’ve already seen a 30% drawdown in Bitcoin this year from the Jan 8^th peak to Jan 21^st low. If we see another 30% pullback from these levels we are looking at $40k again. Tesla has made about $1bn so far on its investment, according to Wedbush.