Global markets shrugged off a higher than expected U.S. consumer price index (CPI) result, with U.S. 10-year bond yields edging lower and equities pushing higher. This likely reflected an element of “sell the rumour, buy the fact”, given fears of a high inflation outcome had lingered for a while. Investors also appear to have concluded (rightly in my view) that this will likely be the peak in U.S. annual consumer inflation, and the inflation we’ve seen to date has been heavily concentrated in a few items (such as used car prices).
Local economic data remained solid, with further strong gains in ANZ Job Ads and the NAB index of business conditions. The Westpac measure of consumer sentiment did slip, albeit from very high levels, which partly reflected yet another Melbourne lockdown and emerging concern over high house prices.
The U.S. Fed meeting looms large, with markets worried that it may hint at a tapering of its US$120b in monthly bond purchases sometime soon. I suspect the Fed will try not to rock the markets at this stage, with Fed chair Powell reiterating current themes that the recent lift in inflation is likely temporary and the economy retains ample spare capacity. One other risk, however, is if a few more Fed players – potentially even a majority – pencil in a 2023 rate rise in the ‘dot plot’ forecasts.
In Australia, Thursday’s May labour force report will provide a further indication of the extent to which the end of the JobKeeper scheme in March has affected employment. April employment did drop by 30k, though this was attributed to a higher than usual number of workers apparently taking Easter holidays. Either way, the market is anticipating a 30k rebound in employment in May, which would suggest the negative impact was indeed limited given the V-shaped recovery in activity.
Across global markets, equities inched higher last week, helped by a chunky drop in long-term bond yields. Despite the drop in yields, however, the $US strengthened and gold dropped. Oil and iron-ore prices also rebounded.
Within global equity markets, Europe is continuing to show relative outperformance as it catches up to the U.S. in emerging from the COVID crisis. The drop in bond yields also helped growth outperform value. It’s early days, but if inflation and bond yield fears have peaked, so might have the rotation to value. That said, markets still need to negotiate the seemingly inevitable tapering in U.S. monetary stimulus over coming months, which poses upside risk to bond yields.
Within Australia, equities pushed on to a new record, helped by lower bond yields. As evident in the switch to growth globally, the local technology ETF (ATEC) has also started to demonstrate some outperformance, which came partly at the expense of financials last week. The $A remains range-bound, having de-coupled from the volatile performance of iron-ore prices in recent months.