Fed’s Powell More Concerned About Deflation — Investors Move to Safety

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Federal Reserve Chairman Jerome Powell told a Princeton professor that he sees deflation as more likely than inflation for the near-term, a topic that the coronavirus-induced recession has sparked some debate on. Investors moved into safety as Powell spoke. 

"We see prices moving down,” Powell said. "You’ll see weak inflation data for while. The upside risk to inflation is not great.” 

The 10-Year treasury yield fell to 0.66% by mid-morning, after having sat at 0.68% for a few hours. Investors move into treasuries and other safe assets when they see economic growth fading or worsening, as the need for higher yielding and riskier assets like stocks are in less demand if inflation will be pressured. 

Stocks remained steady, at the roughly 0.4% loss the S&P 500 had been sitting at for the morning. Stocks had fallen a bit more harshly than that for a moment, but the heavily-tech weighted S&P 500 index was supported by tech stocks like Apple  (AAPL) - Get Report, Amazon  (AMZN) - Get Report and Microsoft  (MSFT) - Get Report, which all rose between 0.2% and 0.6%. Investors clamor for growth tech stocks in times of economic uncertainty, as those companies have secular growth drivers that can mostly cut through economic headwinds. The tech-heavy Nasdaq rose 0.2%. 

Recently, some strategists and investors have pointed to the rapidly growing money supply — resulting from monetary and fiscal stimulus — and the recent surge in loan volumes as signals that the economy has bottomed and that inflation will pick up. 

Cyclical sectors that perform well during growth and inflation have outperformed the broader market since mid May. Those includes banks, industrials and consumer discretionary stocks, which were all laggards Friday. 

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