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LGT Beacon: Inflation will not spoil the equities bull market

May 26, 2021

An above-consensus gain in US consumer prices in April raised concerns about the inflation outlook and briefly boosted stock market volatility. We looked into inflation dynamics and their potential impact on markets and found that they are broadly in line with expectations, and hence neither overly worrying, nor likely to spoil the equity bull market.

The latest reading of the US consumer price index, published on 12 May, showed a surge of 0.8% in April from March. The number is more than seven standard deviations higher than the average divergence of the average analyst forecast from the actual value.

Compared to a year earlier, i.e. when the economy was in the depth of the pandemic-triggered lockdown freeze, the CPI had risen 4.2%, while the consensus had predicted a gain of 3.9%. The April data print contained unusually strong price developments in lockdown/reopening-related areas: prices for used cars and trucks, airline fares and lodgings away for home had risen 21%, 10.7%, and 8.1% year-on-year, respectively.

Equities sold off on that day and the US stock market volatility index VIX soared 26%, recording its biggest one-gain since February. Market volatility has retreated again since (graph 2), while equity markets have mostly recovered – albeit with somewhat less upward momentum than before.

We thus used the opportunity to review current inflation dynamics and assess the resulting outlook for the financial markets in the coming months.

Read on by clicking the link here: LGT Beacon

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Note: The next edition of the LGT Beacon is scheduled for June 2021.