US inflation reaches it’s highest level for thirteen years
The long-anticipated US inflation data for the month of April was released this week, marking the one year anniversary of when the US economy entered into a Covid induced economic lockdown. Both headline and core (excluding food and energy) inflation surpassed expectations, coming in at 4.2% and 3.0% respectively, the highest level in around thirteen years. US Treasury yields (which move inversely to price) rose, with the yield on the 10-year climbing above 1.70% which caused the equity markets sell off with few areas spared. However, by Friday, 10-year Treasury yields were back down at 1.64% and equities had begun rebound.
As of noon London time on Friday, the US equity market had dropped by 2.8% over the week, with the technology sector having fallen 4.6%. European equities were fairly defensive, having not rallied anywhere near as much as the US over the past twelve months and trading at discounted valuations. European equities fell 1.1%, and similarly UK equities 1.8%. The Japanese stock market fell 2.6% over the week, having rebounded by 2.3% on Friday alone. The Australian market was also fairly defensive, having fallen 0.9%. Both mining stocks and financials outperformed over the week, two sectors to which the Australian market has high exposure. Emerging markets lost just over 4%, whilst domestic Chinese ‘A’ shares were an outlier, rising 2.4%.
A Volatile week for commodities
Crude oil, having rallied intraweek, with Brent crude peaking at $69.88 a barrel, fell back towards the end of the week, now trading at $67.7. It was a similar story for other industrial commodities which ended up in negative territory for the week, having made gains earlier on. The copper price ended down just over 2%, trading at $10,327, whilst iron ore fell by a similar amount. Gold had sold off on concerns that the inflation data may prompt a reaction from the US Federal Reserve (Fed), however, once the Fed reconfirmed that they view the inflation data as transitory, the precious metal rallied once more, leaving it broadly flat for the week, trading at $1,834 an ounce.
Issues under discussion
Although US inflation was ahead of expectations, the sharp increase remained within the range of outcomes predicted by economists in recent months. The Fed has said that it believes these price pressures will be temporary and are as much to do with supply issues during reopening. Combined with last Friday’s US non-farm payrolls which missed expectations spectacularly, with 266,000 new jobs having been created in April versus forecasts of 1 million, it is not surprising that bond yields have settled down towards the end of the week. For the Fed to change its stance on monetary policy, it is likely to want to see both price pressures and falling unemployment figures.
