Market Overview

14 July 2021

Inflation Spikes and Congressional Hearings Seem to Barely Spoil the Market Party

As the U.S. Federal Reserve’s (Fed) head Jerome Powell and Treasury Secretary Janet Yellen are ready for two days of Congressional testimony, against a thrilling background of another inflation spike in the American economy, the three major New York stock indexes continue to consolidate tranquilly in the direct neighbourhood of all-time highs. The U.S. consumer price index (CPI) set a fresh record of 5.4% annual growth, with the so-called "core" CPI excluding food and energy segments also hitting the 4.5% bar, which is an absolute maximum of domestic price dynamics since 1991. As for the common CPI, it has  only been higher once, which was  at 5.6% in August 2008. A month-by-month inflation indicator gave another +0.9% boost, repeating the first monthly +0.9% shocking result released in the middle of May and after "just" +0.7% CPI surplus in June. 

The Dollar seemed to capitalised on that statistical anomaly, but some losses on Tuesday, July 13 American session in both EUR/USD and GBP/USD look temporary, and the world's top reserve currency edged lower again in early European trade today. In particular, the British Pound gave a splendid account of itself strengthening well above 1.3850 again after the U.K. inflation numbers also surprised to the upside. The CPI on the British Isles gained as much as 2.5%. Economic activity is growing in the U.K. even despite all lasting anti-Covid restrictions, which are thought to start being lifted on July 19. 

Although there are no sufficient grounds for this yet, FX traders may still have hopes for an earlier tapering of stimulus measures in Great Britain, while continental Europe and the United States seem to remain completely indifferent to this idea. Meanwhile, The Bank of Canada is widely expected to remain the only central bank in the world for now that has already started monetary tightening and may consider some continuation of its asset-buying program tapering at its meeting that is scheduled for today. If this really happens, it may give some additional space for the Canadian Dollar to rise, moving below the 1.24 mark for the USD/CAD pair. 

By the way, the European Central Bank’s (ECB) chairwoman Christine Lagarde commented for Bloomberg TV during the e weekend that the European regulator's July 22 meeting is "going to be important" in terms of establishing a new-styled forward guidance to "tolerate" inflation higher than the ECB's custom 2% goal. The ECB's current 1.85 trillion-euro bond-buying plan will run, she said, "at least" until March 2022, with interest rates staying near the very rock bottom for an "extended period of time". This keeps just a limited space for the EUR/USD to consolidate maybe inside the price range between the current support of 1.17 and the nearest resistance levels around 1.20, for the near-term prospect. 

Turning back to the U.S., the Wall Street Journal reported on Tuesday that the Federal Reserve Bank of St. Louis President James Bullard shared his personal or "minority opinion" in dissent of the Fed's mainstream by saying: “With the economy growing at 7% and the pandemic coming under better and better control, I think the time is right to pull back emergency measures,” adding that the Fed should start cutting back its bond buying in the near future. 

But the market continues to consider this as the opinion of a rather "fake opportunist", while the strong majority of the Federal Reserve's governors repeatedly confirm their commitment to maintaining an ultra-soft stimulating policy for a long time, putting a blind eye on the boiled inflationary processes. New York Fed's chief John Williams just commented once again on Monday that the U.S. economy has not yet achieved the "substantial further progress" threshold set for a possible reduce of the central bank's asset purchases at some point in the future, while San Francisco Fed's President Mary Daly warned on Friday that a 'premature' withdrawal of stimulus would be "a big risk", given the continued spread of new strains of the Covid-19 virus globally. 

The market still expects more assurances of the same kind about the "transitory" nature of the current inflation spikes during the top level congressional hearings today and tomorrow. As previous experience has shown, Janet Yellen is still able to at least mention some prospect of future tightening of monetary policy, in form of discussion on some abstract and very distant future as a theoretical model, but not as advice to the Federal Reserve, on which she no longer has a direct influence as a finance minister. But Mrs Yellen may use the hearings as an excuse to scare the market a little, just to cause a small inflow of protective capital into treasury bonds. 

Even this mild and cautiously "hawkish" rhetoric from her side is not guaranteed, and also it is not seen to be very impressive for the investment community. As for Mr. Powell, he usually sticks to the guideline of playing down any talks of changing the current ultra "dovish" monetary policy, helping stocks to keep their maximum confidence for the continuation of the rally. Therefore, the base scenario for now is that the testimony would be able to cause just some intraday volatility but not to change the Wall Street's mood. And for now, it continues to grow and be led by strong achievements of the high tech sector. Amazon, Google and Facebook shares just recently soared to their record highs, as Apple joined them to refresh its all-time record too after Bloomberg reported that the company has asked suppliers for 90 million iPhones this year, a 20% jump from the shipments in 2020. According to the report, Apple’s initial run of a device from the time of its launch through the end of the year has usually hovered around 75 million units. 

The first strong financial reports of the U.S. banking sector represented by JPMorgan Chase and especially Goldman Sachs yesterday, as well as inflationary expectations supported the shares of largest bank institutions. Financial services led by the record setting Visa shares also seem to benefit from growing transaction turnover. U.S. retailers including Walmart or Target are not frightened but rather inspired by fresh inflation figures. The entertainment industry like Disney, as well as airlines, are waiting for the powerful effects from the wider opening of the economy. Taking all this into account, July may become another month of growth for the U.S. stock market and, if so, European indices are highly likely to follow the example of the American rivals.

 

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