How can the US government fight inflation?

Despite inflation, America is head-to-toe stock-loving

The new US administration is passionate about saving the economy and thus fundamentally promoting stocks. However, with Corona aid worth billions, the risk of a noticeable acceleration in inflation also increases. If this leads to rising interest rates, the liquidity boom, the long-term lifeline of stocks, will dry up.

The US middle class is responsible for around 50 percent of jobs in the private sector. In this respect, the clouding mood there and, above all, the weak willingness to invest in Washington are viewed with concern.

The Biden administration must reconcile the country again and knows that this goal can best be achieved with an economic perspective. Therefore, the American anti-crisis mechanism remains highly active in breathing new life into the winter labor market recovery that stalled. In fact, the employment planning at service providers has ironed out its corona dent and is pointing upwards.

The new US Treasury Secretary Janet Yellen wants to return to full employment as early as 2022. This suggests that the current economic stimulus package will amount to over 1.9 trillion. US dollar, which is essentially aimed at stabilizing consumption, will not be the last. In addition to restoring the pre-coronal status quo, it is about new, valid economic perspectives. Extensive infrastructure measures, including as part of Biden's Green New Deal, will follow.

Is inflation coming back with taste?

With its gigantic stimulus injections, the US government is accepting inflation. This is fueled in any case when the expected easing of the budget brings with it a lot of purchasing power and catch-up effects on the economy, e.g. on restaurants, retail and tourism. Inflation expectations are already pointing steeply upwards and are at their highest level since autumn 2018.

But how sustainable are the price increases, which are currently largely based on base effects, see oil price?

Basically, the relationship between growth and inflation that existed until the real estate crisis in 2008 has recently become less pronounced. Because even the most massive tax cuts and the most expansive monetary policy have not significantly increased US capacity utilization and thus the price increase. American companies also have their products manufactured worldwide. And the advancing digitization increases productivity and thus has a deflationary effect.

Incidentally, the job market is not only about the quantity of jobs, but also their quality. Now that employment in high-income industry has wiped out its corona gap, the expected labor market recovery is based heavily on the service sector. However, retail and gastronomy belong to the low-wage sector.

Overall, there will be more inflation, but it will be comparatively restrained.

The monetary policy boom continues despite inflation

The US economy continues to have the full support of the Fed. Fed Chairman Powell's recent call to the Economic Club of New York for a "national effort" to overcome the Corona crisis is clear. The supportive monetary policy must be flanked by fiscal aid. The Fed will remain an interest rate suppressor for a long time to come in order to finance even the most generous economic stimulus packages.

In any case, the Fed has changed its inflation doctrine, according to which after a long period of time, including periods of above-average price acceleration, are not taken into account. With this rubber paragraph, rising inflation rates or expectations in the meantime do not lead to rising interest rates and do not pose a risk for stocks.

This means that the valuation advantage of US government bonds remains so great that stocks retain their ample degrees of freedom in their valuation according to the price / earnings ratio. In any case, the current drop in valuations in the industrial sector is due to better profit prospects.

In general, US monetary policy must keep American debt management in mind. Rising yields could lead to financial risks with government debt approaching the 30 trillion mark. The US is not wronged by assuming that debt is inflating away. Interest rates that are below the price increase are not only accepted, but desired. The debt of two world wars and the Vietnam war have already been brought under control. At this point it should be mentioned that the official inflation is well below the real one.

Last but not least, rising interest rates should not favor a strong US dollar that would make life more difficult for the export economy. And this is not only true because of the currently still weak economic situation. The strong dollar policy of the past is a thing of the past.

US stocks stay in, including those in the second tier

In a global comparison of equities, US stocks set the tone. The technology exchange Nasdaq is proving to be the clear winner in the age of digitization - home office, industrial automation, cloud data storage. In a US industry comparison, large tech stocks are rated comparatively high and therefore harbor an increased risk of interim profit-taking. Therefore, stocks from the second row, which have a higher price leverage than the FAANG values, should also be taken into account.

In addition to consumer stocks, medium-sized stocks from the industrial and raw materials sectors also benefit from American economic fantasies. These can be found primarily in the Russell 2000 stock index.

In contrast, classic energy stocks must continue to expect underperformance in view of Biden's clean energy fantasies.

Against this “green” background, hydrogen is a promising future technology and offers valid business models. Associated stocks are expensive, especially since many companies are still making losses. Practical solutions for participating in this mega-topic are ETFs and funds.

Market situation - further silver lining on the horizon

While the stock markets in the USA are constantly reaching new all-time highs and Asia is also showing itself to be very robust, the development in the euro zone and Germany is more subdued. The background is, among other things, that German policy only extends lockdown measures, but remains guilty of clear vaccination and transparent easing prospects compared to other regions and countries. Why are hairdressing salons allowed to open and is body contact allowed there while it is denied in cosmetic studios? And anyway, why do contactless retail outlets or gyms have to remain closed? The uncertainty among consumers, the self-employed and companies is not surprising.

Graphic of the week

There are thus increasing signs of an economic recovery at the two speeds. According to the economic expectations for the next six months determined by the investment consultancy firm Sentix, investors see positive effects, particularly in America and Asia. In comparison, the upward trends in Germany and Europe are giving way. This economic fork should be confirmed by the coming week's purchasing managers' indices for industry and services in the euro zone and the USA.

This is also reflected in the growth in corporate profits. Here the euro zone is far behind the USA, the emerging markets and Germany. Export-dependent German cyclicals benefit from the global economic tailwind.

Global economic policy uncertainty has receded significantly from its peak in May 2020. However, due to Corona and simmering geopolitical conflicts - e.g. between the USA and China - it is still at a high level. However, if there is an economic recovery from the second half of the year - as expected - the markedly declining uncertainty will be reflected in further positive share developments.

Sentiment and chart technique DAX - risk appetite dominates

So far, negative headlines have largely been rolling off on investor sentiment. The willingness to take risks dominates. This can also be seen in the sharp rise in Citigroup's Macro Risk Index since the beginning of the year.

Accordingly, the propensity to invest in stocks remains high while the propensity to hedge is decreasing. Due to overheating and an unpredictable Corona news situation, however, temporary price setbacks must be taken into account.

In terms of the chart, the DAX encounters initial resistance on its way up at 14,050. Above this, the index moves towards the barriers at 14,132 and 14,170. If there are temporary setbacks, the first supports are at 13,985 and 13,962. Below that, the DAX hits further hold lines at 13,861, 13,825 and 13,740 points.