The long-anticipated US inflation data for the month of April was released this week, marking the point one year ago when much of the US economy had 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% and equity markets sold off with few areas spared. However, by Friday, 10-year Treasury yields were back down at 1.64% and equities had begun to fight back.
As of 12pm London time on Friday, the US equity market had fallen by 2.8% over the week, with the technology sector having fallen 4.6%. European equities were relatively defensive, having not rallied anywhere near as much as the US over the past twelve months and trading on lower valuations. European equities fell 1.1%, and similarly UK equities lost 1.8%. The Japanese stock market was down 2.6% over the week, having rebounded by 2.3% on Friday alone. The Australian market was also relatively 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%.
10-year German bunds and UK gilts also fell in price over the week, currently trading at yields of -0.13%, and 0.87% respectively.
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.
Chinese factory gate inflation at its highest level in three years
Prior to the US inflation data being released on Wednesday, Chinese factory gate price data pointed to rising price pressures, with goods leaving factories at prices 6.8% higher. This was the highest level of price increases seen for three years.
Issues under discussion
Although the US inflation print was ahead of expectations, the sharp increase remained within the range of outcomes flagged by economists in recent months. The Fed has said that it believes these price pressures will be transitory and are as much to do with supply issues during reopening, which will iron themselves out over time. 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 tune on monetary policy, it is likely to want to see both price pressures and falling unemployment figures.
It is worth noting that the Job Openings and Labor Turnover Survey released by the US Bureau of Labor Statistics puts a different slant as to what is happening in the US jobs market.
8.1m new job openings were created as of the 31st March, the highest number since the data series began 20 years ago, and about 1m more than seen on a monthly basis versus 2019.
This suggests that the weak employment data for April was more about supply than demand. Whether this has been triggered due to continued concerns about Covid or whether it is because unemployment benefits have become that much more generous, we do not know. But, when demand heavily outpaces supply, it tends to lead to wage increases to tempt workers back.
This suggest the US economy may be running at hotter levels than some of the recent data releases suggest. Therefore, bond yields are likely to rise further from here.
Within the portfolios, we continue to lean into more economically sensitive areas of the market, recognising that in the short term at least, inflationary pressures are unlikely to go away.