Data released this week pointed towards further momentum in the global recovery from the Covid pandemic and inflationary pressures continuing to build, although not outside of expectations. Different US Federal Reserve governors, who are responsible for the setting of interest rate policy in the US, are increasingly giving conflicting views as to the likelihood of some sort of monetary policy tightening this year, although the central message remains one of patience. Therefore, the release of specific economic data, such as the latest US employment data due out later today, has become even more significant than usual from the markets perspective, as investors try to second guess the direction of US monetary policy.
Improving PMI data
Investors were greeted with a slew of improving purchasing managers indices globally, which are surveys that seek out from companies how their operating environment has changed. They encompass new orders, employment and investment intentions and pricing pressures amongst other factors. This was combined with firming commodity prices, as crude oil broke through $70 a barrel, the highest level in three months, pointing towards rising global demand.
Covid remains an ever-present threat
However, investors are also reminded that the spectre of Covid remains ever present as the UK government, having been expected to open up more countries as holiday destinations, instead tightened the guidance, as they moved Portugal to a list that requires quarantining. Predictably, airline stocks suffered sharp falls on the back of the news.
Recovery stocks continue to be rewarded
As of 12pm on Friday, London time, US equities over the week fell 0.3% and US technology stocks lost 1.0% as investors rewarded stocks more sensitive to the improving economic backdrop. European equities rose 0.5%, as did UK equities, both benefitting from the rising oil price, as energy stocks globally rose 5.0% for the week on the back of the strengthening oil price. The Japanese market rose 0.6% and Australian stocks, heavily geared into commodities and financials, rose 1.6%. Emerging markets also joined in the improving outlook, rising 1.7%.
ECB expected to stay pat despite jump in inflation
The first estimate of consumer prices in April were released for the Eurozone this week, coming in at 2.0%, above the European Central Bank’s (ECB) target. However, the ECB, much like the US Federal Reserve, is expected to keep interest rates on hold and its asset purchase programme unchanged at €80 billion a month, as they also believe inflationary pressures will be transitory.
US non-farm payrolls due out today
US initial jobless claims fell to their lowest level since Covid was recognised as a pandemic, pointing to continued improvement in the labour market. Today it is forecast that 650,000 new jobs will have been created for the month of May. However, this data follows that of the huge disappointment in April, when only 266,000 new jobs were created against expectations of 1 million.
US Treasury yields await jobs data
Against this, US Treasury yields (which trade inversely to price) have crept up slightly this week, now trading at 1.62%. Similarly, UK gilts have traded up to 0.83%, whilst German bund yields have fallen ever so slightly, trading at -0.19%.
Issues under discussion
The rise in inflation this year had been well documented ahead of the data being released, as a simple consequence of the number being a year-on-year figure. What remains unclear is the medium-term outlook for inflation and whether it becomes more persistent into next year.
For the moment, markets are rewarding stocks that have the most to gain from an end to economic lockdown and renewed growth. However, if at some point in the coming months, inflationary pressures ebb away, this could change very quickly.
Consequently, within the portfolios we have chosen to increasingly lean into the recovery story, whilst continuing to hold structurally winning companies, even if in the short term the latter suffer some share price weakness. We are looking for greater clarity as to whether this pandemic has likely led to faster economic growth or whether the global economy returns to a low growth, low inflationary world as best described by the previous decade, before we make any bolder decisions.