Market Overview

9 June 2021

The Market Community Hardly Seems Afraid of U.S. Inflation Data

World markets are mainly treading water ahead of the U.S. inflation data due to be released this Thursday. The expert community survey by media giants Bloomberg and Reuters is expecting on average that the consumer price index (CPI) in May could reach as much as 4.7% year-on-year. If so, it may set the second record in a row for the last 13 years since the summer of 2008, when the U.S. CPI was at 5.6% at some pre-crisis point. 

The previous indication of consumer prices for April showed 4.2% rise. When those numbers were published on May 12, many considered such an extraordinary phenomenon as an alarming signal that could potentially prompt the Federal Reserve (Fed) at least to announce some future active action like the start of asset buying program tapering for the sake of financial defence. However, nothing of that sort happened. Various officials of the U.S. monetary regulator repeated the mantra that any pandemic-induced inflation spikes are temporary, being committed to the idea of allowing the price front to rise well above their official 2.0% target of average annual inflation to use it as a milestone only for the long term. As for this year, and maybe even next year, the Fed lets the inflation monster go free. 

Perhaps this is the actual reason why stock indexes are now stoically calm on the day before the next inflationary "surprise", which is no longer considered to be a surprise by many. Even if the American inflation process may go through the roof of more than 5% at some point, as it was at the very beginning of the economic depression in 2008, the S&P 500 broad market index may hold the heights or even rise again, as well as its European stock counterparts. It seems that a very small part of the market now believes in the analytical fairy tales as if investors may seek salvation from inflation inside the pool of currency protective assets, especially in the so-called "safe haven" U.S. Dollar, which is the main generator of all this inflationary spiral. 

Gold, as another potentially protective asset, can still be used in this role simply because it is part of the usual proportional adding of typical stock portfolios, along with the purchase of some new shares or just for diversification. This is exactly what is being observed with gold spot and gold futures quotes, but even a further rise in gold, if it may take place at all, will probably be limited to the repeating of recent November's and January's highs located in the area of just above $1950 per troy ounce. 

The simple idea is that if a hypothetical burger may ever soar more and more in price, then the revenue of that burger's producers, as well as their profits, will also grow in absolute terms by about the same percentage, and on the next step, in absolute terms again, the shares of such a manufacturer will also rise in price. And this rise would not allow market inhabitants to seriously believe in the collapse of the markets only because of inflation, if only the rest of the economy recovery will be well done. A similar process may occur with the shares of issuers in various other industries or in the service sector, if the scale of prices are to continue to change everywhere across the world or national economy. And, of course, if central banks will not try to make lending money less affordable. 

This is why markets did not react strongly even on the words of the U.S. Treasury Secretary Janet Yellen, who said literally the following sentence trying to defend President Joe Biden's $4 trillion spending plan, in an interview with Bloomberg News: "We've been fighting inflation that's too low and interest rates that are too low now for a decade... we want them to go back to a normal interest rate environment, and if this helps a little bit to alleviate things then that's not a bad thing - that's a good thing." 

Madamе Janet Yellen's explanation was not taken by market investors as a kind of hint for an imminent rise in interest rates soon, as she was forced to dissociate herself from this idea last month already. Her words are rather looked upon as an indulgence for the upcoming inflationary surge, which would justify the emergence of new stimulus plans and, therefore, for printing more money, when she tries to attribute to this future inflation process some good consequences in the form of hypothetical monetary policy normalisation maybe in some distant future. But, certainly not within months, neither in the current or next year or some particular time at all. 

Of course, some volatility in the U.S. and even European bond yields is possible because of such comments on the inflation prospects, and that bond yield's small changes may affect some currency pairs too, as the U.S. Dollar seems to be a little bit generally oversold for the last several weeks. But, this is more a limited correction agenda which may slightly widen the range borders for EUR/USD, GBP/USD or even for some commodity-dependent currencies, rather than a reason to worry about any attempts of mid-term market reversal. Excerpts from articles about the alleged choice between bonds and tech stocks against an inflationary background also look more like fake stories, since these are completely different groups of investment assets. Bond investments are conservative, while tech stocks are associated strongly with increased risks for the sake of high returns.



Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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