Key Forecast Trends

• The imminent rollout of COVID-19 vaccines has made it more likely that economic life will soon return to some version of “normality.” After a difficult winter, we expect global growth to pick up quite strongly next year.
• We caution against thinking this marks a durable improvement in the longer-term outlook. The global economy faced structural headwinds prior to COVID-19, and the intervention of a global pandemic is unlikely to have improved things.
• Still, the near-term outlook has brightened. The question now is whether stronger growth will lead to a more broad-based reflation in consumer prices and bond yields.
• The pieces are finally falling into place for the shift to a higher inflationary regime. But with the US dragging its heels on fiscal policy, output gaps widening and inflation expectations dormant, it’s hard to see this happening in 2021.
• The main aim of monetary policy in recent months has been to facilitate fiscal policy by keeping bond yields low. This new regime will be tested as growth recovers.
• Yields are unlikely to rise much in Europe or Japan. But the US market has not yet internalized the possibility that current yield levels might be “normal,” making the outlook for US yields less certain.
• With the US Federal Reserve (the Fed) intent on driving inflation and inflation expectations higher, it is unlikely to react to stronger growth the way it has in the past. That doesn’t mean yields won't rise at all, but a return to pre-crisis trading ranges is unlikely.