Expecting Good News

When we last checked in on the “new abnormal”—an unusually tight connection between the market’s expectations for inflation and growth—the relationship was alive and kicking. A month later, nothing has changed, or so it appears. Taken at face value, that’s encouraging. Implied inflation (defined as the yield spread on the 10-year Treasury less its inflation-indexed counterpart) and the S&P 500 stock market index (a proxy for growth expectations) are still joined at the hip. In recent years, a fall in the inflation outlook has preceded macro weakness. But there’s no sign of that anxiety. For what it’s worth, the crowd isn’t in pricing new troubles, at least nothing that’s radically different from the usual afflictions of recent months.

A sign of worry would be a sharp and sustained fall in inflation expectations. That’s atypical for peering ahead for evaluating growth within the long sweep of economic history, but it’s been the norm in recent years. Why? The economist David Glasner explains here for why “rising inflation expectations work their magic.” One day that will change, but not yet.

Meanwhile, the fact that inflation expectations are holding their ground, and the stock market is inclined to confirm the buoyancy, suggests that the recent turbulence in several economic reports—weakness in housing starts and higher jobless claims, for instance—isn’t truly indicative of the broader trend.
Of course, expectations and hard numbers don’t always line up. The next installment on testing if the two sides are in agreement, or not, arrives later today with the news on last week’s new filings for jobless benefits.