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LGT Navigator: Recovery on Wall Street despite worrying inflation signals

May 14, 2021

Although the latest data from the US did little to calm investors' inflation fears, the indices on the New York Stock Exchange managed to stage a recovery. However, in view of the highest inflation rate in the US for more than twelve years and the surprisingly strong rise in American producer prices, it is questionable how sustainable this will be. However, as long as the central banks regard the surge in inflation as only a temporary phenomenon, the danger of interest rates rising soon does not yet seem acute. However, investor skepticism is likely to continue to weigh on the stock markets in the near future.

Recovery on Wall Street despite worrying inflation signals

While there was no trading on most stock exchanges in Europe due to the holiday, a recovery began on Wall Street. The Dow Jones Industrial gained +1.29% to 34,021.45 points on Thursday, after the stock market barometer had fallen the previous day to the lowest level in a month. The broad S&P 500 rose at the same time by +1.22% to 4,112.50 points and on the technology exchange Nasdaq went up by about +0.8%. Latest inflation data from the U.S. had initially strengthened the interest rate concerns of investors and provided still on Wednesday for strong reactions in the financial markets. While stock prices came under pressure in midweek, the yields of US government bonds increased. The yield of the ten-year benchmark Treasury climbed to as high as 1.67%.

In Asia, most stock indices followed the positive guidance from the US. In Tokyo, the Nikkei 225 trades just under +2.5% higher and the Hang Seng in Hong Kong gains about +1%. In China, the Shanghai Composite achieves a daily gain of about +1.5% at the end of the week. 

Inflation rate in the US higher than at any time in more than twelve years

US consumer price inflation was +4.2% in April, the highest level since September 2008! A massive increase over the inflation rate of +2.6% reported in March. Analysts had expected an increase to +3.6% in the Schmitt. Compared with the previous month, consumer prices also rose significantly by +0.8%. The main drivers were energy prices. However, even without considering energy prices and food prices, which are often susceptible to fluctuations, the core inflation rate of +3% is considerable. On a month-on-month basis, core prices rose by +0.9% - the strongest increase since 1982! Prices at the producer level have also risen. As the data published yesterday showed, US producer prices in April increased more than expected by +6.2% on an annual basis to the highest level since September 2011 (consensus +5.8%, March +4.2%). However, economists mainly point to statistical base effects due to the economic slump triggered by the Corona restrictions. Nevertheless, the latest figures from the US are unlikely to calm inflation concerns.

Richard Clarida, Vice Chairman of the Federal Reserve (Fed), stressed that the significant increase in inflation in April does not yet pose a major threat and that the development is likely to be temporary. However, the extent of the current rise in consumer prices had surprised even him. He expects inflation rates to continue to rise initially, but to calm down again by the end of the year. If inflation rises to levels inconsistent with the central bank's mandate, the Fed will be ready to act, Clarida stressed.

Brussels executive raises growth forecast

Europe's economy will grow faster than previously expected this year and next, according to the EU Commission, thanks to the vaccination campaign and easing of pandemic measures. For the European Union, the executive expects a GDP growth rate of +4.2% in 2021 (previously +3.7%) and +4.4% in 2022 (+3.9%). For the 19 eurozone countries, the Brussels-based authority forecasts expansion of +4.3% this year and +4.4% the following year (previously +3.8% each).

Germany's inflation rate reaches the two percent mark for the first time in two years

The sharp rise in energy prices drove consumer prices in Germany to their highest level in two years in April. On an annual basis, the cost of living rose by +2.1% (EU harmonized), marking the fourth month in a row that consumer prices have increased since the temporary VAT cut expired at the end of 2020. Energy prices (+7.9%) were particularly noticeable, with the CO2 levy introduced at the start of the year and the decline in prices for energy products a year ago also having an impact. Excluding energy prices, the German inflation rate would have been +1.4%, and excluding gasoline and heating oil, it would have been as low as +1.2%. The German ECB director Isabel Schnabel expects that the inflation rate in Germany could soon exceed +3%. However, she said that the ECB's monetary policy is geared to the medium term, which means that the central bank should not be impressed by short-term fluctuations.

Economic Indicators May 14

MEZ Land Indikator Letzte Periode
09:00 SP Consumer Prices (April, y/y) +1.9%
13:30 EZ ECB Minutes (from April 22)
14:30 US Retail Sales (April) +9.7%
15:15 US Industrial Production (April, m/m) +1.4%
16:00 US Consumer Sentiment University Michigan (May) 88.3

Earnings Calender May 18

Land Unternehmen Periode
IT Generali Q1
FR Engie Q1
UK Vodafone Q1
US Walmart Q1
US Home Depot Q1

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