Weekly View - Game on
Inflation numbers out of the US last week took economists by surprise while making little impression on bond markets. Prices in the world’s largest economy rose by their highest annualised rate in May than in nearly 13 years, far exceeding forecasts. Even more remarkably, core US inflation, which excludes more price volatile items like energy and food, rose by 3.8% annualised, its highest rate since 1992. Puzzlingly, bond yields dropped below their recent range. A combination of factors could be at play behind this. First, the credibility of the Federal Reserve’s insistence that any future tapering of quantitative easing or interest rate rises will be gradual. Second, underlying inflation without outliers and economy reopening effects remains lower. And third, bond market positioning has become more balanced, with foreign investors having become net buyers once again. In the week ahead, we will be watching for any indications of tapering timing after the Fed meets.
In Europe, world leaders have been busy setting global agendas, with the G7 summit having taken place over the weekend and US president Biden scheduled to meet with Russia’s president Putin in Geneva on Wednesday. We expect little advancement between the two leaders. Following an altogether different type of meeting, the European Central Bank (ECB) took a dovish decision last week, maintaining a “significantly higher” pace of Pandemic emergency purchase programme (PEPP) purchases in Q3. They are however, increasingly confident over the medium-term outlook and we believe likely to reduce purchases after their next meeting in September. Meanwhile, producer price inflation in China continues to surge on rising commodity prices, but the transmission to consumer prices has been limited and the peak may be behind us.
It was a relatively uneventful week for equities, which stayed mostly stable in absence of any fresh catalysts in either direction. One exception was biotech firm Biogen’s stock, which rose 38% on the back of regulatory approval of its Alzheimer’s drug. We continue to emphasise the importance of stock selection and expect further outperformance in cyclical/value stocks later this year. Commodities markets had a different story. Brent prices hit a post-pandemic high, while industrial metals continue to trade at levels elevated above their trading corridor of recent years. And finally with the Eurocup kicking off one year behind schedule, live fans in the stadiums signify the welcome beginnings of a return to normality.