August 20, 2017 – The Federal Reserve and the European Central Bank (ECB) released minutes from their respective July meetings. The ECB fretted about the Euro’s strength, a potential headwind to both the Eurozone’s recovery and the ECB’s efforts to lift inflation. Based on preliminary data, EU inflation rose just 1.3% in July compared to a year ago. Fed officials debated the U.S. inflation outlook, with some taking the view that further rate hikes should be shelved until data confirms that the recent weak inflation data is transitory. More hawkish members cautioned that such a delay could lead to an overshooting of inflation “that would be likely be costly to reverse.”
Actual inflation and inflation expectations remain quite subdued. In the graph titled, “5 Year, 5 Year Forward Inflation Expectation Rate”, over the last 5 years, expectations of inflation 5 years has declined and currently remains below 2% despite a robust and tightening labor market. Market participants and investors seem to believe that inflation will remain low despite anticipated pro-growth policies from the Trump administration.
Similar to long term inflation expectations, rates remain low and range bound as do credit spreads. In the chart titled, “Rates and Credit Spreads”, 10 Year Treasury yield and CDX Investment Grade 5 year index spread both have declined slightly since the beginning of the year but also have been quite range bound for the first 7 ½ months of the year. For Alternative Lenders in both US and in Europe, this creates the perfect environment for both borrowers and investors alike. Investors continue to have appetite for attractive risk adjusted returns being generated in the Alternative Lending space as traditional assets on a relative basis seem ‘rich’.
Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.
Sources: St. Louis Federal Reserve, TIAA-CREF, Barclays