‘Trillion on top of a trillion’ in stimulus will push 10-year Treasury yields to 2% by year-end, top forecaster says

‘Trillion on top of a trillion’ in stimulus will push 10-year Treasury yields to 2% by year-end, top forecaster says

Massive U.S. fiscal stimulus will overwhelm the crippling economic impact of the coronavirus over the next few months, says Aneta Markowska, chief economist at Jefferies and the winner—along with money market economist Tom Simons—of MarketWatch’s Forecaster of the Month contest for the second month in a row.

“If you give people money, they are going to find a way to spend it,” Markowska says. Although the U.S. economy lost steam late in 2020, that “negative momentum will reverse by February,” she says.

With Democrats controlling Congress, the economy will likely get another fiscal boost of “a trillion on top of a trillion,” she says. “I don’t see how that doesn’t have a positive effect.”

She figures the economy will hit full employment by the end of 2022, which might lead the Federal Reserve to signal a taper or a liftoff a lot earlier than investors expect. The yield on the 10-year note
which is now around 1.14%, could approach 2% by the end of 2021, driven by changing expectations about growth, Treasury supply and monetary policy.

“Markets will have to reprice the Fed liftoff,” Markowska says. “The election was unambiguous” for bond investors, but the impact on the stock market will vary across sectors. The rotation into small-caps, value and cyclicals “makes sense” to her team.

She’s confident the government will “work out the kinks” that marred the rollout of the COVID-19 vaccinations. By the middle of the year, roughly half of the U.S. population will have been vaccinated, she estimates.

Markowska is unperturbed about the possibility that all that stimulus will fuel inflation. “Demand is up, but supply will go up a lot,” she says.

Much of the cash will be spent on services as face-to-face businesses such as restaurants, entertainment and personal services reopen for business.

Retail inventories are relatively low, but producers are working overtime to replenish stocks.

As the economy continues to recover, she expects imbalances between supply and demand will fade. Inventories in housing and retail are at the lowest levels in decades, putting upward pressure on prices. But not to worry, she says: “An old-fashioned industrial expansion is kicking in” that should rebuild inventories and subdue inflationary pressures.

Markowska and Simons have won our forecasting contest three times in the past nine months, including two months in a row. December’s contest was one of our closest ever, with the team from Jefferies winning by a whisker in what was essentially a five-way tie for first.

The runners-up in the December contest were Michelle Meyer’s team at Bank of America, James Sweeney’s team at Credit Suisse, Christophe Barraud of Market Securities, and Jim O’Sullivan of TD Securities.

Two of Markowska and Simons’s forecasts—for the trade deficit and the consumer confidence index—were the most accurate forecasts among 44 forecasting teams. Three others—for nonfarm payrolls, the consumer price index, and new home sales—were among the 10 most accurate.

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