Market measures of inflation expectations have risen to recent highs, as President Donald Trump’s tax plan regains momentum, reigniting the possibility of future economic stimulus.
The 10-year breakeven inflation rate, which measures the difference in yields of nominal and inflation-protected bonds, rose to 1.88 per cent on Thursday morning in New York, its highest level since the beginning of May.
It echoes moves after Mr Trump was elected in November 2016, which saw longer-dated interest rates and inflation expectations surge on the presumption that tax reform and other stimulative economic policies would bring higher growth.
“The reflation trade started out strong after the election and then faded but it has seen a bit of a bounce back,” said William Irving, a portfolio manager at Fidelity.
But some analysts have aired caution, with current proposals a long way from being signed into law. Analysts at BMO Capital Markets said:
Taking a step back, it’s easy to draw the parallels between the current attempt to price in tax reforms and all of the implied economic (and inflationary) upside with a comparable move earlier this year. The exercise leads us to consider why it might be ‘different this time’ and the most compelling response we can find to that question is that the involvement of the House GOP leaders adds an air of legitimacy to the effort, although that alone does very little to make goals of the tax plan any more politically obtainable.
The media has characterized the current push as a ‘now or never moment’ for tax reforms and while perhaps that is in fact the case, if the GOP’s failure to repeal Obamacare is any guide, an unfortunate ‘never’ outcome may once again be delivered.
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