Market Update – 10th June 2021.

There has been no significant economic data releases so far this week, and given inflation continues to be the hot topic, all eyes are on the US CPI inflation reading which will be released later today.

As such, it has been a rather uneventful week so far with most of the major global equity markets little changed.

While we fully expect today’s US inflation reading will show a big year-on-year increase, we remain sceptical that we will see a sustained increase in US inflation, as we simply don’t believe that these increases have staying power:  last year’s distorted commodity prices will quickly pass through the data calculations; while the supply chain disruptions caused by the coronavirus lockdowns should soon normalise.

Additionally, it was pleasing to note that while data from China yesterday showed that PPI inflation (producer prices index) rose from 6.8% in April to 9.0% in May (which was not only much higher than economists expected, but is actually the fastest pace since 2008), Chinese CPI only increased to 1.3% from 0.9%, which was significantly lower than the major economists expected – which suggests that producer prices aren’t feeding into consumer prices.

So fingers-crossed all the recent hype surrounding run-away inflation (and as a by-product; higher interest rates), today’s US CPI inflation reading will turn out to be much ado about nothing and the market narrative can move on – especially as we believe we are entering a Goldilocks environment.

This is where the economy is like a good porridge, neither too hot nor too cold, but ‘just right’.

Financial markets love this type of environment as it is one that allows the global economy and employment market to recover and then grow with no significant underlying inflationary pressures – and this in turn lets the major global central banks (the Fed, BoE, ECB and BoJ) to maintain their respective accommodative monetary policies and allow company earnings to grow.

Investment Management Team