Small spaces and many unknowns: being selective is a must

• The Biden Plan in the United States and the Next Generation EU configure, in fact, the entry into a state capitalism of which there is no trace in recent economic history


• It is not certain that the expansionary policies pursued in the United States and Europe will generate higher inflation in the long run. Much will depend on the content of the plans and how they are implemented and financed.


• Market prices meanwhile discount the best of scenarios with room for growth limited to the sectors that have suffered most from the pandemic


• In the early months of 2021, the surge in US rates in the long part of the curve favored some sectors, banking and insurance in particular, a movement that now seems to have stalled. However, the rate curve influenced by inflation expectations will be an important reference for the choices in the coming months



With the presentation of the two-trillion-dollar infrastructure plan on March 31st, US President Joe Biden has effectively inaugurated a new phase of economic policy by giving the markets a new upward push.


It could be defined as an economic policy 3.0 as an ideal sequel to the two previous expansive phases: the first (classic), preceding the great financial crisis of 2008, in which central banks set base rates to stimulate or slow the economy down; the second, introduced in 2008, also led by central banks, marked by the now popular quantitative easing programs (QEs), unconventional purchases of government bonds taken now to their extreme limits.


The new fact of economic policy 3.0 inaugurated by Joe Biden is that of a joint line of action between the government and the central bank. Something similar to what is happening in Europe with the Next Generation EU, the fund approved last July by the European Council to help states get back on track: to return the resources received from the fund, European states will issue debt and the ECB will buy those bonds.


Up to now, the distribution of money originating from the interventions of central banks has certainly had the merit of giving oxygen to the economy (and feeding the financial markets) without, however, being addressed by an industrial vision or, again, to a specific segment of society. Economic policy 3.0 (in the two American and European variants) will instead follow a plan, albeit not yet well defined in the US, which will direct resources towards the most productive uses (hopefully). We have therefore entered a new state capitalism with governments as primary actors in the choices. A fact of which there is no trace in recent economic history.


Will this new expansionary policy accelerate inflation? At first glance, one would have to give a positive answer, for the simple reason that the money is put directly into the hands of companies and of people, who sooner or later will spend it with the inflationary effects of the textbook.


In reality, the question is a little more complex than that. If we look at the five-year break-even inflation (the inflation rate implicit in the prices of an index-linked government bond, for example the American TIP, minus that of a straight coupon bond with a similar residual life), we note that, after a substantial movement following the Federal Reserve's declarations on the new inflation target, there was a slowdown in inflation growth expectations and the break even at ten and thirty years confirms this. In the medium term, therefore, the markets do not expect inflation to rise sharply.


Why? The answer is linked to the many doubts that accompany the markets today. Starting with the recovery of the economy beyond the current year. Strong GDP growth is expected in the United States in 2021 but the signs that a virtuous multi-year path has begun are still to be confirmed. The Biden Plan itself, although impressive in size, is still undetermined in its content and, in any case, will have to pass the parliamentary test. Then there is the fiscal unknown. The hypothesis proposed by the new American administration of global taxation, although still to be verified, could have a braking effect with respect to inflation expectations.


Doubts also concern China's moves. On July 1, the Communist Party's 100th anniversary will be celebrated and it is likely that the government wants to reach the date with an economy in full recovery but a subsequent slowdown of the stimulus (already underway) is likely.


Finally, there is another question of no small importance: what effect will the transformations that the pandemic is causing in the world economy have on globalization? An answer is not possible today but it is clear that even this factor could weigh on the evolution of inflation.


All things considered, therefore, we should conclude that today we are not at the beginning of a new inflationary phase or that, in any case, too many elements make it uncertain.


In addition to the liquidity generated by central banks, the markets have so far fed on economic data that are increasingly better than expected, which have also made commodities rise significantly. The S&P index passed 4,100 points (with relatively low volumes) and the prices, on the whole, discount the best of scenarios. The remaining spaces for growth are found in the sectors that have suffered most from the effects of the pandemic (airline and cruise lines, airport management companies and, more generally, companies linked to the tourism industry).


The interest rate curve as modified by inflation expectations will be an important reference in the coming months. In the first months of the year, the surge in the ten-year rate curve favored banking and insurance sectors. This movement, in our opinion, is to be considered temporarily on hold. It will now be necessary to see if, with the clarification of the situation on the issues mentioned above, the steepening of the curve will once again become a key issue. A continuation of the steepening will bring attention back to banks and insurance companies. In the opposite case, the rally of Nasdaq securities characterized by significant residual value could continue. Whatever the evolution, purchases will have to be dealt with in a highly selective way.



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