Global CIO Commentary by Scott Minerd
While a broad-based secular increase in inflation will be a problem that comes most likely in the next decade, a number of technical and cyclical forces, such as healthcare and shelter costs, are working to push consumer prices higher over the next six months or so. However, these forces are unlikely to spark sustained inflation in the near term, given that the U.S. unemployment rate is still quite high, the labor force participation rate has been on a downward trend for a number of years, and capacity utilization is still significantly lower than the threshold associated with a broad increase in consumer prices. In the medium-term, wage pressure will continue to rise and aggregate demand should improve. Rather than being the harbinger of an inflationary spiral many investors fear, that should be positive for economic activity.
Our research suggests that the yield on the U.S. 10-year Treasury bond should now be 3-3.25 percent, yet yields have been hovering around 2.6 percent. Keeping rates low in the near term are technical factors such as central bank accommodation flooding global markets with liquidity and some form of quantitative easing likely coming in Europe.
This week's ADP report showing U.S. firms added 281,000 jobs in June, the most since November 2012, is the latest sign that the U.S. economic recovery is picking up steam. Over the next two to three years, given that economic growth is likely to be stronger, unemployment is likely to be lower, and inflation is likely to be higher, we will eventually start seeing fundamentals take over, resulting in higher yields on U.S. Treasuries. Assuming the U.S. Federal Reserve starts raising interest rates mid to late next year, we could see the U.S. 10-year Treasury bond reaching a cyclical high of somewhere around 3.75-4 percent.
U.S. Wage Pressure Approaching, But Not Here Yet
An improving labor market, brighter growth prospects, and higher capacity utilization are pointing to a U.S. economy approaching equilibrium. Historically, once the economy moves past equilibrium, whether defined by unemployment, output, or capacity, significant wage inflation tends to follow. Though we are drawing nearer to these levels, it is likely to take one year or longer before the gap is closed and broad-based wage inflation emerges.
U.S. OUTPUT, UNEMPLOYMENT, AND CAPACITY GAPS VS. WAGE INFLATION
Source: Haver, Guggenheim Investments. Data as of 7/2/2014. Note: We define the output gap using Congressional Budget Office (CBO) data on potential GDP, where the gap is the difference between actual and potential GDP as a percentage of potential GDP. We define the capacity utilization gap in the same way, using 82 percent as the natural rate. We define the unemployment gap using CBO data estimates of the natural rate of unemployment.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 3.31.2019 and includes leverage of $11.3bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.