Stocks shrug off inflation pressure

David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — June 14, 2021



Despite a growing chorus of concern over rising inflationary pressure, stocks climbed to a new closing high last week. The S&P 500® index rose 0.4 percent, its third straight week of gains, to close at 4247, leaving it higher on the year by 13.1 percent. And the complexion of the market leadership looked quite different from the recent past. Healthcare and Real Estate led the way higher at the sector level and were joined by Technology and Consumer Discretionary. Trailing behind, and all with losses on the week, were Financials, Materials and Industrials. 

One of the primary drivers of last week’s moves in equities was the sharp decline in bond yields. The ten-year Treasury note yield dropped ten basis points to 1.45 percent, its lowest level in three months. As a result, longer duration equity groups suddenly looked more attractive, while cyclicals suffered. In the process, the VIX index of implied equity volatility ended the week below 16 for the first time since February 20 of last year, one day after the market peaked prior to the onset of the pandemic induced downturn. 

The Fed may be forced to face inflation concerns sooner rather than later 

The drop in bond yields came despite another inflation report that was higher than expected. The May consumer price index rose 0.6 percent, bringing the trailing twelve-month increase to 5.0 percent. That was above the 4.7 percent consensus expectation and was the first inflation reading at 5.0 percent or higher since 2008. The core rate climbed to 3.8 percent, well above the expected 3.5 percent, and its highest level since 1992. The Federal Reserve has insisted right along that higher prices will not persist, but rather normalize over time as the distortions of the pandemic work their way through the economy. Although not everyone agrees, that narrative currently holds the upper hand. The Fed meets this week and will update its economic projections. Closely watched will be any indication that members have brought forward their expectation of when to anticipate the first-rate hike. As a prelude to that, any further discussion of when the Fed might begin to consider tapering the pace of its bond purchases will be closely monitored. 

This week’s economic calendar provides a look at May data, including producer prices, retail sales, industrial production, housing starts, leading indicator. Forecasts for third quarter GDP are in the neighborhood of 10 percent annualized. The Atlanta Fed’s GDPNow forecast currently anticipates growth of 9.3 percent. Excluding last year’s third quarter pandemic rebound growth rate of 33.4 percent, the last time GDP reached double digit growth on a quarterly basis was 1978. 

Eurozone equities see their highest close since January 2008; Stocks in Asia struggle  

Eurozone equities added 0.9 percent last week as measured by the EuroStoxx 50 index, reaching its highest close since the onset of the financial crisis in January, 2008, and leaving it higher on the year by 15.4 percent in dollar terms. The European Central Bank (ECB) met last week and reiterated its commitment to maintaining its own accommodative stance, including its previously expanded bond buying program, citing its own belief in the transitory nature of rising inflation in the Eurozone. The ECB released its own upwardly revised economic projections, now forecasting 2021 GDP growth in the Eurozone of 4.6 percent and 4.7 percent in 2022. Inflation is expected to rise 1.9 and 1.5 percent this year and next. 
Stocks in Asia continued to struggle with the effects of the pandemic, as a slower vaccine rollout in many countries is causing supply chain bottlenecks to worsen. The MSCI Asia Pacific index declined 0.2 percent last week in dollar terms, and has risen just 5.0 percent year-to-date. China reported a surge in producer prices last week, along with trade figures that were slightly softer than forecast. This week’s scheduled reports on retail sales, industrial production, and fixed investment are all expected to show some moderation from the prior month. 

The G-7 agrees on a global corporate tax minimum; Alignment on infrastructure in Washington seems far off  

Last week the G-7 countries agreed to a global corporate minimum tax of 15 percent, accelerating a process to achieve general worldwide agreement that has been underway for seven years under the direction of the OECD. Designed to prevent a global race to the bottom of competitively lower tax rates, it would tax multi-national companies where they generate revenue, rather than where they are domiciled. The proposal next goes before the G-20 in July. 

Back in Washington, attention will refocus on the various infrastructure proposals on the table, but the outline of any final agreement so far remains elusive. 

Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

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The 10 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 10 years.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options. VIX values greater than 30 are generally linked to a large volatility resulting from increased uncertainty, risk and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.

A consumer price index (CPI) measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households. The annual percentage change in a CPI is used as a measure of inflation. 

The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.

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