The future’s unclear, especially when it comes to anticipating the trend for inflation. Or so it appears based on comparing the Treasury market’s implied forecast vs. recent estimates from several prominent investment and consultancy shops.
Let’s start with the Treasury market, which continues to price in a rebound in US inflation expectations. Consider the 5-year Note’s implied estimate, based on the yield spread for the nominal rate less its inflation-indexed counterpart. After diving in March, threatening to reach zero and perhaps go negative, the forecast has bounced sharply in recent weeks. At yesterday’s close, the 5-year spread ticked up to 1.14% (June 23)—the highest since March 6—the early days of the coronavirus crash in global markets.
One theory is that the rebound is simply rethinking the extreme estimate of disinflation/deflation risk. As economies have reopened after the shutdown, and economic activity has partially recovered, the crowd is revising inflation expectations to the formerly modest-but-still-positive outlook and that’s about as far as it will go, for now.
The next several weeks will be closely watched for clues on whether the market is inclined to extend the reflationary outlook that’s prevailed lately.
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Meanwhile, official inflation gauges still reflect weak pricing pressure. The headline measure of the Consumer Price Index in May fell sharply, approaching zero for the one-year change.
By some accounts, the recent surge in monetary and fiscal stimulus to fight the economic blowback from the coronavirus will eventually lead to higher inflation, perhaps substantially higher.
“What worries me is that at the moment it seems that there is no limit to fiscal stimulus,” says Klaus Kaldemorgen, a portfolio manager at asset manager DWS.
Many economists see a different future. “The outlook for core inflation in both the US and the eurozone is likely to remain subdued over the medium term, necessitating the ongoing support of current unconventional monetary policies,” predicts Robert Sierra, director of Fitch Rating’s economics team.
We expect Eurozone core inflation to end 2021 below 0.5% while in the US we see core PCE ending next year at below 1% from a recent average of 1.5% in the three months to April. This will leave core inflation in both the US and the eurozone well below their inflation targets.
Manny Roman, chief executive officer of the bond shop Pacific Investment Management Co., agrees and forecasts that “the days of inflation we remember are gone.” Although he expects inflation will gradually rise from current levels, the return to a low-2% pace is about as far it will go for the near term.
A critical factor for the inflation’s trend in the months and years ahead is the path of economic recovery. A new survey of economists by FiveThirtyEight.com anticipates that the dramatic decline in US output will be followed with a sharp but partial recovery and an extended period of relatively slow growth, according to 73% of respondents. “There is nothing standard or smooth about this recovery,” advises Lisa Cook, professor of economics and international relations at Michigan State University.
The upcoming second-quarter GDP report is expected to be unusually ugly. The Atlanta Fed’s GDPNow model, for example, is nowcasting a dramatic 45.7% crash in economic US activity in Q2, based on the current estimate for the annualized rate (as of June 17).
Growth will likely bounce back later in the year in some degree, but the main event that will influence the macro trend and inflation for the foreseeable future: the arrival of widely distributed coronavirus vaccine, or not.
Representing the leading front for optimism, Dr. Anthony Fauci, the top infectious disease expert in the US government, told Congress yesterday that he’s “cautiously optimistic” that a vaccine could be ready as early as the end of this year.
If accurate, the outlook for inflation may turn out to be closer to the Treasury’s market’s estimate. Alternatively, if a vaccine arrives later than expected (or is only partially effective), inflation could remain unusually subdued for years.
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Forget Ron DeSantis: Walt Disney has a much bigger problem
The company’s political woes are a sideshow to the one key issue Bob Iger has to solve.
Walt Disney has a massive, but solvable, problem.
The company's current skirmishes with Florida Gov. DeSantis get a lot of headlines, but they're not having a major impact on the company's bottom line.
DeSantis has made Walt Disney (DIS) - Get Free Report a target in what he calls his war on woke, an effort to win right-wing support as he tries to secure the Republican Party nomination for president.
That effort has generated plenty of press and multiple lawsuits tied to the governor's takeover of the former Reedy Creek Improvement District, Disney's legislated self-governance operation. But it has not hurt revenue at the company's massive Florida theme-park complex.
Disney Chief Executive Bob Iger addressed the matter during the company's third-quarter-earnings call, without directly mentioning DeSantis.
"Walt Disney World is still performing well above precovid levels: 21% higher in revenue and 29% higher in operating income compared to fiscal 2019," he said.
And "following a number of recent changes we've implemented, we continue to see positive guest-experience ratings in our theme parks, including Walt Disney World, and positive indicators for guests looking to book future visits."
The theme parks are not Disney's problem. The death of the movie business is, however, a hurdle that Iger has yet to show that the company has a plan to clear.
Disney needs a plan to monetize content
In 2019 Walt Disney drew in more $11 billion in global box office, or $13 billion when you add in the former Fox properties it also owns. In that year seven Mouse House films crossed the billion-dollar threshold in theaters, according to data from Box Office Mojo.
This year, the company will struggle to reach half that and it has no billion-dollar films, with "Guardians of the Galaxy Vol. 3" closing its theatrical run at $845 million globally.
(That's actually good for third place this year, as only "Barbie" and "The Super Mario Bros. Movie" have broken the billion-dollar mark and they may be the only two films to do that this year.)
In the precovid world Disney could release two Pixar movies, three Marvel films, a live-action remake of an animated classic, and maybe one other film that each would be nearly guaranteed to earn $1 billion at the box office.
That's simply not how the movie business works anymore. While theaters may remain part of Disney's plan to monetize its content, the past isn't coming back. Theaters may remain a piece of the movie-release puzzle, but 2023 isn't an anomaly or a bad release schedule.
Consumers have big TVs at home and they're more than happy to watch most films on them.
Disney owns the IP but charges too little
People aren't less interested in Marvel and Star Wars; they're just getting their fix from Disney+ at an absurdly low price.
Over the past couple of months through the next few weeks, I will have watched about seven hours of premium Star Wars content and five hours of top-tier Marvel content with "Ahsoka" and "Loki" respectively.
Before the covid pandemic, I gladly would have paid theater prices for each movie in those respective universes. Now, I have consumed about six movies worth of premium content for less than the price of two movie tickets.
By making its premium content television shows available on a service that people can buy for $7.99 a month Disney has devalued its most valuable asset, its intellectual property.
Consumers have shown that they will pay the $10 to $15 cost of a movie ticket to see what happens next in the Marvel Cinematic Universe or the Star Wars galaxy. But the company has offered top-tier content from those franchises at a lower price.
Iger needs to find a way to replace billions of dollars in lost box office, but charging less for the company's content makes no sense.
Now, some fans likely won't pay triple the price for Disney+. But if it were to bundle a direct-to-consumer ESPN along with content that currently gets released to movie theaters, Disney might create a package that it can price in a way that reflects the value of its IP.
Consumers want Disney's content and they will likely pay more for it. Iger simply has to find a way to make that happen.
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Stock Market Today: Stocks turn higher as Treasury yields retreat; big tech earnings up next
A pullback in Treasury yields has stocks moving higher Monday heading into a busy earnings week and a key 2-year bond auction later on Tuesday.
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