Being the first to know when interest rates will start rising again can be worth a lot of money, and investors at Yarra Capital Management think they have worked out the key to it: long-term inflation expectations.
A new analysis from Yarra’s head of macro and strategy, Tim Toohey, shows inflation expectations are rising fast in the US, leading the Federal Reserve to start tightening the amount of cheap money it is pumping into the system by mid-next year.
In Australia these expectations are rising much more slowly, leaving the Reserve Bank to tighten later than the US.
As the world is awash with cheap money, financial markets are keenly trying to guess the time when interest rates start rising, the cheap liquidity starts to drain and some indebted investors are left high and dry having paid too much for some assets.
In Australia, the Reserve Bank has said that inflation must be sustainably back between 2 to 3 per cent before it would increase the cash rate from its current record low of 0.1 per cent. It has not spoken much on inflation expectations.
Read more…. (subscription to The Australian Financial Review required)