January 5, 2021
That’s the bet being placed today across financial markets. A big government spend would add even more fuel to the asset price fire, putting “inflation risk” (and maybe hot inflation) in the crosshairs.
With that “hot inflation” scenario in play, commodities are up big today. The dollar is down. And rates are on the move, up.
The 10-year yield will be the spot to watch in the first half of the year as the market begins to project this scenario where the Fed, for the first time in a long time, will be caught behind the curve on inflation.
But despite the big move in gold yesterday, and the despite the follow through today of this 2021 inflation theme, I suspect we can take very little information from the first two trading days of the year, at this point. That is, unless tomorrow’s joint session of Congress produces no drama. Every indication points to the opposite.
Yet, with a VIX today at 25, the markets continue to underprice the risk of chaos surrounding the Electoral College count tomorrow.