US President Joe Biden’s fiscal intervention to be used to support the US economy, which is approaching three times the productive gap in the US economy, fiscal program of $1,9trn size, has caused strong turbulence in fixed income markets, triggering a percentage boost in government bond yields on both sides of the Atlantic Ocean.
by Trust Economics-https://trusteconomics.eu
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On the European side of the Atlantic Ocean, turbulence may also stem from the fact that capital markets are aware of the EU’s delay in dealing with the economic consequences of the pandemic, now causing government bond yields to rise by distinguishing the particularly high public debt of some Euro area/EU member countries.
But the sharp rise in bond yields in fixed income markets may not necessarily be a sign of a discount to strong growth but of higher inflation.
The fact that share prices instead of moving to higher levels moved to lower levels should make us more skeptical.
In other words, if we were to see higher share prices combined with an increase in government bond yields, we would say that it is a sign of an expected higher rate of economic growth that would also result in higher levels of inflation than current inflation levels. But that did not happen.
When we have an expected high real rate of economic growth, share dividends tend to be higher than rising yields on government bonds due to higher borrowing capital costs through government bonds.
For this reason, share prices should rise, giving a signal of the expected strong economic growth.
So, given that in the week ending 26 February 2021 we had a fall in stock market indices with an increase in government bond yields, this is a sign of a more cost inflation picture fueled by current high commodity prices rather than a sign of expected strong growth in Europe and less in the US, respectively.
If the EU is under this “prophecy” then the Pandemic Emergency Purchase Program (PEPP) to strengthen the European economy should be implemented immediately and in its entirety during 2021.
So, because the markets anticipate that the expected growth in the EU will not be strong, but what will emerge is the emergence of cost inflation – due to large increases in commodity prices – then the budgetary statements of the most burdened, in terms of public debt and government budget deficit respectively, of member countries will deteriorate.
In the United States we are likely to have a future tightening of monetary policy due to an increase in inflation but not for the current and next year.
For the EU, however, the introduction of its economy into a situation of lower growth and recovery accompanied by higher-than-expected inflation requires immediate implementation of the PEPP program to successfully address the problem.
