What has happened
Yesterday was another test of how deeply embedded the transitory inflation narrative was in the mind of market participants. The answer is ‘well embedded’ as risk assets shrugged off the latest US CPI print despite it beating to the upside. By the end of the day, Treasury yields were higher but this had more to do with weaker demand during the 30 year auction.
US CPI
The headline CPI print came in 0.5% higher than expected at 5.4% year-on-year with the core CPI number, which excludes volatile items such as food and energy, surging to 4.5% versus 4% expected. The reopening sub-items had another outsized impact with used cars up 10.5% over the month which builds on price momentum from previous months. With the delta variant causing further delay to the global synchronisation of reopening, it may take several quarters or a year for most of the supply side disruptions to filter out of the data sets. This buys time for the transitory narrative and allows investors to look through these near term beats.
Fed Chair Powell
The market’s attention will now shift to Fed Chair Powell’s testimony before the House Committee on Financial Services to see whether the Fed view has been shaken by the latest reading. One of the release valves for higher inflation is pricing in further Fed rate rises. This is exactly what we saw yesterday, with a rate hike priced in for the end of 2022, and it will be interesting to see if Powell indirectly or directly addresses this market pricing.
What do we think?
One of the drivers behind the retrenchment in bond yields over the last month has been revisions lower to global growth expectations. This partially reflects a lack of momentum in some areas but also the rise of the delta variant that will emphasise countries’ relative success on vaccination rollout and the strength of their healthcare system. Increased divergence between regions and countries risks further supply side disruptions given the complicated supply chains that are a feature of globalisation. A lot of the inflation we have seen so far this year reflects higher producer prices, driven by commodities (which have supply issues as well as an upswing in demand) and increased logistics costs. Longer term inflation requires increased confidence about pricing power and it is probably too early to call whether this will restart in 2022 after a long post financial crisis hiatus.
| Index | 1 Day | 1 Week | 1 Month | YTD | |
| TR | TR | TR | TR | ||
| MSCI AC World GBP | 0.2% | 0.0% | 3.0% | 12.0% | |
| MSCI UK All Cap GBP | -0.1% | 0.2% | 0.1% | 13.3% | |
| MSCI USA GBP | -0.1% | 0.0% | 5.0% | 15.0% | |
| MSCI EMU GBP | -0.1% | 0.4% | -0.6% | 11.3% | |
| MSCI AC Asia ex Japan GBP | 1.5% | -0.9% | -0.5% | 2.7% | |
| MSCI Japan GBP | 0.9% | 0.4% | 2.3% | 1.9% | |
| MSCI Emerging Markets GBP | 1.3% | -0.9% | -0.9% | 3.6% | |
| MSCI AC World IT GBP | 0.7% | 0.3% | 7.9% | 13.6% | |
| MSCI AC World Healthcare GBP | 0.1% | 0.2% | 4.2% | 10.0% | |
| Barclays Sterling Gilts GBP | 0.4% | 0.5% | 1.6% | -4.4% | |
| Barclays Sterling Corps GBP | 0.3% | 0.2% | 1.2% | -1.8% | |
| WTI Oil GBP | 1.8% | 2.1% | 8.1% | 53.0% | |
| Dollar per Sterling | -0.5% | 0.1% | -2.1% | 1.0% | |
| Euro per Sterling | 0.2% | 0.5% | 0.6% | 4.9% | |
| MSCI PIMFA Income | 0.1% | 0.3% | 1.2% | 7.0% | |
| MSCI PIMFA Balanced | 0.1% | 0.3% | 1.5% | 8.1% | |
| MSCI PIMFA Growth | 0.1% | 0.3% | 1.9% | 10.2% | |
Source: Bloomberg as at 14/07/2021. TR denotes Net Total Return
