Inflation from Lacking Supply Chains

The Chief Investment Officer at Bleakly Advisory Group, Peter Boockvar shed some light on the inflationary force that the pandemics impact on our global supply chain will have going forward. He separated inflation into two buckets – services inflation and goods inflation. Services inflation have had a steady increase in the past few years driven largely by increasing rent and medical costs. However, there is goods deflation in many sectors as we have seen a race to the bottom for pricing in so many industries in the past few years. These two have kept a minimal level of inflation (below the Fed’s 2% target). Boockvar claims that we are not going to have good deflation going forward for a couple of reasons. Currently, many companies supply chains are restricted as many failed during the middle of the shutdown. And going forward, supply chains will not be able to grow as fast as demand increases as more and more economies open up. These things will push goods prices up – an inflationary force. We are seeing inflation rise now, however, many predict a much larger increase once a vaccine is created and supply chains are further overwhelmed. As we know, inflation is the nemesis of bonds. So if we do see a massive rise in inflation, we can expect to see mortgage rates move higher.

Mortgage backed securities are up 8 bps, continuing their upward climb toward their 25 day moving average. We could see them fall or take a leap higher once they hit that point.