Market Update – 13th May 2021.

The big miss in US employment last Friday (7 May 2021 – please see here), hasn’t stopped the markets obsessing about inflation (and as a result, higher US interest rates), especially given the shutdown of the largest US fuel pipeline due to a cyberattack has resulted in petrol shortages and higher petrol station prices.

And unfortunately yesterday’s (Wednesday 12 May 2021) US CPI inflation reading will ensure that this obsession is going to continue, as April’s headline inflation reading came in at 4.2%, up from 2.6% in March.

We knew, and have been warning in these commentaries, that year-on-year inflation readings in the coming months will quickly accelerate, in what is known as the ‘base effect’ due to the effect of last year’s coronavirus distorted prices, but a reading of 4.2% was much higher than everyone, us included, expected.

While we appreciate that it is hard to avoid the sensationalised news headlines around surging inflation fears, and at the expense of appearing blasé, we don’t believe it mattered if yesterday’s reading was 3.2%, 4.2% or 5.2%, as it is unlikely to have any impact what so ever on the Fed’s monetary policy decision, as the increase is transitory.

This was clearly visible to us when we broke down the inflation components:  a significant proportion of April’s sharp increase in inflation was due to higher used car prices.  In fact, used car prices rose 10% thanks to both the semiconductor shortage which has impacted new car production and people being wary about returning to public transport – and as used cars account for around 3% of the inflation basket, this 10% increase alone accounted for approximately 0.3% of April’s 0.8% total increase.  Airfares, car rental and hotel costs also saw large increases as lockdown restrictions eased.

Although 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, unfortunately that hasn’t stopped equity markets giving up last week’s gains – however, we see this week’s sell-off as an opportunity, not a reason to panic.

Investment Management Team

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