The post-lockdown spending frenzy could drive inflation up, but Ed Yarddeny believes the economy can handle it.
Yardeni, who spent decades in Wall Street’s investment strategy for big companies such as Prudential and Deutsche Bank, sees inflation pressures as temporary byproducts linked to massive reopenings and past liquidity.
“People will continue to spend,” Yardeni Research’s chairman told CNBC’s “Trading Nation” on Friday. “Many quarantined demands are being satisfied here for both goods and services.”;
Wall Street received further confirmation last week of strong inflation growth through mainstream personal consumption spending. This is an important measure that the US Federal Reserve (Fed) is closely following. It rose faster than expected 3.1% in April from the previous year.
“As the lockdown restrictions were gradually lifted, we saw a huge increase in shopping. And shopping releases dopamine in the brain,” Yadeni said. “A lot of people just run out and start shopping.”
The first was a product and now it is a service according to Yardeni.
“A lot of the services are being eliminated in terms of what’s open,” he said. “Obviously we’re seeing an opening.”
Yardeni expects inflation pressures to rise for at least a few months.
“The economy is recovering in a V shape. and actually We are back where real GDP was before the epidemic,” he said. “I expect to see an economic slowdown later this year that goes into next year.”
He expects demand to eventually drop even in a booming housing market.
“I can’t imagine the growth rates we’ve seen over the past few quarters are sustainable,” Yardeni said.
But when it comes to rent, Yardeni sees landlords having more pricing power. He found that the rental market was rapidly tightening at the moment.
“Our house is almost finished. These people are hoping to buy things that are inexpensive. And found that prices are up 20% from last year and there are some places,” he added. I’m worried a lot of homebuyers will say, ‘You know what? No mas.’ I surrender. Just stay.'”
What’s next for the Treasury yield?
Yardeni, a long time bull market on the stock market. It is believed that yields on 10-year government bonds will remain relatively favorable even as prices skyrocket.
“In the past few months it has been remarkably stable… Amid higher-than-expected inflation news and a lot of strong economic indicators,” he said, “I think we will see a 2% bond yield.”
It’s not a hit on Wall Street, according to Yardeni. However, he predicts that Federal Reserve policymakers will start talking about the decline sooner than investors think. As a result, he sees a 10-year return ending 2022 about 2.5% to 3%.
“It’s definitely not the end of the world. Because that’s where the pre-epidemic bond yields are,” Yadeni said. “That’s going to be back to normal.”
The 10-year yield ended the week at 1.58%, down nearly 6% over the past two months.