Inflation – 23 June 2021

After last week’s strong sell-off, we saw a classic technical rebound across markets yesterday in the absence of any major macro data. St. Louis Fed President Bullard said that Inflation next year could surprise on the upside. This is supported by a faster-than-expected economic recovery, and was likely to remain above the 2% target. Interestingly, Bullard himself said that the Fed would probably, though not necessarily, complete its tapering of purchases before the first rate hike. If so, this would be a repeat of something similar to what happened between December 2013 (tapering announcement) and December 2015 (first hike). Throwing a spanner in the works is New York Fed President Williams, who has said that the economy has not improved enough to reduce stimulus. And today there will be Powell’s testimony to a House subcommittee.
Western stock exchanges rebounded yesterday in line with the weakening of the dollar and the end of the curve flattening after last week’s strong sell-off. In the US, the rebound was widespread (over 90% of stocks in the S&P500 closed positive), with strong performances especially in cyclical sectors that had been heavily penalised last week, such as energy, financials and industrials. In Europe, the Dax was driven by the automotive, chemicals and mining sectors. The climate of confidence continued in Asia this morning, with Tokyo rising sharply (over 3%), almost making up for yesterday’s losses.
Inflation is there and starting to show, but market conditions are not sufficient to justify an exit from the accommodative monetary policy phase.