Week ending 14th May 2021.

There has only been one theme in play this week:  inflation – thanks to Wednesday’s (12 May 2021) 4.2% US CPI inflation reading.

While this reading rattled equity markets, as we argued in our last market commentary (please see here), this inflation reading was much ado about nothing and as such, equity markets were overly worrying about inflation and interest rate increases – and as you can see in the accompanying table, although equity markets still ended the week lower, after a strong end to the week, equity markets thankfully reversed much of their earlier declines.

Without wanting to repeat our last market commentary, we believe that this week’s US CPI reading simply confirmed what we already knew and have been warning about:  as the 2020 price declines are replaced by the higher 2021 prices, year-on-year inflation readings in the coming months will quickly accelerate (in what is known as the ‘base effect’) before quickly fading.

Interestingly, while today’s (Friday 14 May 2021) University of Michigan’s Consumer Sentiment Index showed that consumers’ inflation expectations over the next 5-10 years had risen, it only moved back to the pre-2008/9 financial crisis levels, which further suggests to us that expectations haven’t become unanchored – and as such, this will allow the Fed to look past the higher CPI readings we will undoubtedly see in the next few months.

Elsewhere, while data showed the UK economy shrank by 1.5% during the first quarter of 2021, the economy actually grew by 2.1% during March, which suggests that we can expect a strong recovery during the second quarter as lockdown restrictions are lifted and the UK economy reopens.

Looking ahead to this coming week we have US, UK & Eurozone PMI data; UK employment data (unemployment rate and weekly earnings); UK & Japanese CPI inflation; Eurozone & Japanese Q1 GDP; UK & Chinese retail sales; and Chinese industrial production.

Additionally, we have the minutes from the Fed’s last monetary policy meeting which was held on 28 April 2021 and a host of Fed policymakers speaking.

Investment Management Team