William John Market Report 11-06-21
Markets react to U.S. inflation data as William John provides an analysis.
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William John Market Report 11-06-21

William John Market Report 11-06-21

Category: Reports

All eyes are on the U.S. inflation data that was released yesterday. According to the U.S. Bureau of Labour Statistics, the Consumer Price Index (CPI) rose 5.0% in May, year on year. This was the largest 12 month increase in the CPI since August 2008. Meanwhile, “core inflation” which measures the percentage change in the CPI less volatile food and energy prices, also rose 3.8% – the highest year on year rise in core inflation since 1992. 

Despite a large rise in price levels, the Federal Reserve has taken the position that the inflationary pressure is due to the economy transitioning from a locked down cycle to a rebounding one. For example, throughout the early stages of the pandemic, inflation remained extremely low. Observing the inflation rate (rate of change in the CPI) from January 2020 until May 2021:

Between March 2020 and March 2021, inflation was below the Federal Reserve’s inflation target of 2.0%. However, since then, it has picked up pace rapidly. Many economists have attributed the rapid rise in inflation to supply chain bottlenecks caused by the transition from a shutdown economy and historically low price levels in months prior. It is expected that supply/demand imbalances will keep inflation sustained at a high level in the coming months but will not last much longer. 

Investors have kept a close eye on the news as inflation erodes the real returns of fixed income securities as well as equities. The yield of the 10-year U.S. Treasury bond spiked on the announcement of the data, rising 0.034 percentage points to approximately 1.53%. An initial sell off of Treasuries is always anticipated after an inflation surprise, however, investors in both markets seem confident that this high inflation is a “transition period” rather than a sustained problem. The yield on Treasuries is only returning to levels observed in early March 2021 and U.S. equities overall were positive, with the S&P 500 and Nasdaq Composite Index rising 0.47% and 0.78% respectively as of 4:00PM Eastern Daylight Time (EDT). 

Market sentiment seems to affirm the Federal Reserve’s position that this inflation is transitory. In which case, current interest rates and quantitative easing programmes are set to continue for the foreseeable future, with no need for a reduction in asset purchases and a hike in the Federal Funds rate. 

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.