In Europe, the Stoxx 600 was down 0.08% as the European Central Bank prepared to set monetary policy.
In Asia overnight, China’s CSI 300 rose 0.67% while Japan’s Nikkei 225 climbed 0.34%.
Markets have been subdued for much of the last two weeks, with investors happy to see stocks tick slowly higher as economies reopen. The S&P 500 and the Stoxx 600 have been trading around record highs.
Yet the US consumer price index inflation data, due to be released at 8.30 a.m. ET on Thursday, has the potential to shake markets.
Economists expect CPI to have jumped 4.7% year on year in May from 4.2% in April, which was the highest reading since 2008.
Some investors worry that rising prices could force the Federal Reserve to reduce its support for the economy. Inflation also erodes the real returns on financial assets. Tech stocks, which have soared in an environment of low inflation and low interest rates, are particularly vulnerable.
Markets should be able to digest a consensus rise in inflation, but will start to worry if the Fed begins to shift its position, Alan Ruskin, chief international strategist at Deutsche Bank, said.
“Next week, the [Fed] is going to have a tougher time maintaining exactly the same ultra-dovish posture as the last few meetings, given the inflation overshoot from prior expectations,” he said.
However, Paul Donovan, chief economist at UBS Wealth Management, said he agreed with the Fed’s view that inflation should be transitory.
“The effect of very low prices this time last year and the uncoordinated reopening of the global economy are contributing to reported price increases in specific product markets, but should not last,” he said.
Elsewhere, bitcoin rallied on Thursday as investors moved in to buy the recent dip, after El Salvador’s move to make the crypto asset legal tender restored some positivity to the market.
The cryptocurrency was up 1.4% to $36,900, having fallen to around $31,000 on Tuesday. It remained roughly 43% below April’s record high, but around 25% higher for the year.
Bond yields edged higher on Thursday, with the yield on the key 10-year US Treasury note rising 0.5 basis points to 1.494%. Yields move inversely to prices.
The bond market has, in recent weeks, appeared unfazed by rising inflation. The 10-year yield dropped below 1.5% for the first time in a month on Wednesday. The dollar index climbed 0.15% to 90.26 ahead of the inflation data.
Global shares eased on Monday, as investors digested a slightly disappointing read of the US labor market and prepared for key inflation data later this week, while oil pulled back from two-year highs.
Friday’s employment report showed the US economy created 559,000 jobs in May, below the 650,000 economists had expected, while April’s number was revised up marginally to 278,000.
The report didn’t offer traders the confirmation they had hoped for of a robust recovery in hiring. At the same time, it dampened the prospect that the Federal Reserve might have to quickly rein in some of its support for the economy, which allowed stocks to end last week on a positive note.
“What the May jobs report does tell us is that despite the high levels of vacancies being reported, there is a reluctance on the part of US workers to return to work,” CMC Markets chief strategist Michael Hewson said.
“This flies in the face of optimism that the economic reopening would prompt a rehiring blitz, making it much less likely that the Fed will look at an early tapering of asset purchases,” he said.
Treasury Secretary Janet Yellen told Bloomberg in an interview on Sunday that if the US economy ended up with slightly higher rates and inflation, this would be “a plus”.
“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” she told Bloomberg.
The next major data point will be US consumer inflation on Thursday, which is expected to show prices accelerated by 4.7% in May, following April’s 4.2% increase.
The Fed has repeatedly said it is willing to tolerate a sharper rise in consumer prices, which it believes will be short-lived. But investors are highly sensitive to any hint from economic data that might suggest an abrupt change in course by the central bank.
The dollar index was up 0.2% on the day, buoyed largely by gains versus sterling and the euro, which were both down by around 0.1% against the greenback. Yields on the 10-year Treasury note, which can act as a gauge of investor confidence, rose 2 basis points to 1.577%, indicating a degree of caution.
Overnight in Asia, Chinese trade data showed the country’s imports rose at their fastest rate in a decade. The world’s biggest commodity consumer overlooked higher raw material prices, although its crude intake slowed and exports undershot expectations. This had little impact on the major indices. The Shanghai Composite ended up 0.2%, while Tokyo’s Nikkei rose 0.3% and Seoul’s KOSPI closed 0.2% higher.
“What is clear is that the value of both imports and exports is a major contributor due to sky-rocketing raw materials prices, and that in volume terms, the evidence for a commodity supercycle emerging is thus far wholly unconvincing,” Marc Ostwald, chief global economist for ADM Investor Services, said.
Oil prices pulled back from last week’s two-year highs after the Chinese trade data, as traders weighed up the market’s ability to absorb a potential supply increase from Iran, which is in talks with global powers over its nuclear activity. Overall, demand is expected to accelerate over the course of the year, although outbreaks of COVID-19 in the likes of India have tempered some of the optimism.
Brent crude futures were last down 0.8% at $71.34 a barrel, having touched a high of $72.17 last week, while WTI futures were down 0.7% at $69.12 a barrel.
Turning to Europe, gains in the benchmark indices were restricted by declines in the mining and resources sector. Shares in Anglo American fell nearly 3%, while copper producer Fresnillo dropped 1.9%, and commodity trader Glencore lost 1.6%. French oil major Total shed 1.3%, making it one of the biggest losers on the STOXX 50 index, which slipped 0.1%. London’s FTSE 100 edged up 0.1%. Meanwhile, the mid-cap FTSE 250 rose 0.2%, shrugging off a 15% loss in the shares of office-space provider IWG, which dropped 15% after the company issued a profit warning for 2021.
US investors are expecting a flurry of earnings and economic policy announcements this week. Federal Reserve Chairman Jerome Powell is due to give a press conference on Wednesday when the central bank concludes a two-day monetary policy meeting. Economists are not expecting significant changes, but investors will nonetheless scour every word for insight into the likely path of interest rates.
“The April FOMC meeting should primarily serve as a barometer check of the economic recovery relative to the substantial forecast upgrades the Committee unveiled at their last meeting in March.” Stephen Innes, chief global market strategist at Axi said. “He’s likely to continue his subtle shift in tone about the outlook in a more promising direction,” Innes added.
President Joe Biden will be delivering his first speech in a joint congressional session on Wednesday, where he will likely shed further light on his infrastructure spending plans. Investors will also get the first glimpse of how the US economy fared in the first three months of the year later this week.
US 10-year Treasury note yield rose to 1.577%, up 1.3 basis points.
Asian markets came under pressure from the surge in COVID-19 cases in India and elsewhere across the continent. China’s Shanghai Composite closed 0.95% down, Hong Kong’s Hang Seng Index was down 0.4% at the end of the trading day.
The Japanese Nikkei 225 continued to recover after last week’s mixed performance linked to lockdown extensions in the country and closed 0.36% up. The Bank of Japan is set to release rate decisions and its quarterly outlook on Tuesday, although no significant policy changes are expected.
Concern about the economic impact of another wave of Covid-19 also impacted oil prices. WTI crude oil prices were last down 1.14% and Brent crude oil was down 1.16% on Monday. Cases in India, the third largest oil consumer in the world, rose at record rates this weekend, leaving families of patients scrambling for hospital beds and oxygen.
“There have been reports that’s various models are predicting this could hit over 500,000 per day this week which will gain huge headlines. While Indian case loads are so high, there will be concerns about the unevenness of the global recovery and the ability of variants to escape,” Deutsche Bank research strategists said.
Ursula von der Leyen, the President of the European Commission said fully vaccinated Americans could travel to the European Union this summer, potentially providing some impetus for the long-haul travel and energy sectors, but this was not enough to prop up crude oil.
European stocks started flat on Monday, the pan-European Euro Stoxx 50 was last up 0.04%, the UK’s FTSE 100 was down 0.07% and the German DAX was up 0.14%.
Bitcoin recovered over the weekend and rose above $50,000 again, after a highly volatile week which saw the cryptocurrency reach record highs paired and lose significant ground. It was last valued at $52,772.93 on Monday.
US futures slipped on Monday, as investors braced themselves for a busy week of economic data, company earnings and government bond sales, and digested Federal Reserve Chairman Jerome Powell’s comments that the US economy is at an “inflection point.”
Shares fell in Asia overnight, with China’s CSI 300 down 1.74% and Japan’s Nikkei 225 0.77% lower.
In Europe, the Stoxx 600 index slipped 0.43%. Britain’s FTSE 100 fell 0.81%, despite England reopening shops, gyms and pubs.
US stocks rose solidly in the week to Friday as bond yields fell, with the S&P 500 climbing 2.71% as tech stocks got a boost. Lower yields, which move inversely to prices, have helped the US’s giant tech stocks look like attractive investments during the COVID-19 crisis.
But analysts say bond yields have the potential to kick higher over the coming days in the wake of consumer inflation data due on Tuesday and three US bond auctions across the week.
Consumer price index inflation data is due on Tuesday, with economists polled by Reuters expecting a jump to 2.5% from 1.7% year on year in February.
Producer price inflation rose at the fastest rate in more than 9 years in March, data showed Friday, hitting 4.2% year on year.
The sale of 3-, 10-, and 30-year US government bonds could also unnerve the market if demand is low.
“I have suspected that the US yield story had not gone away,” Jeffrey Halley, senior market analyst at Oanda said. “This week’s data calendar will give plenty of ammunition to prove me right or wrong.”
Investors were also weighing up Fed Chair Jerome Powell’s latest comments.
The head of the world’s most powerful central bank said in an interview with CBS, which aired on Sunday, that the US is at an “inflection point” and is likely to see a boom in growth and hiring, but still faces threats from COVID-19.
“The outlook has brightened substantially,” he told CBS’s “60 minutes.” Yet he said there was a risk that coronavirus starts spreading again.
Another round of major company earnings is also set to begin, with Wall Street titans Goldman Sachs, JPMorgan, and Wells Fargo due to report on Wednesday.
Deutsche Bank analysts said in a note they expect S&P 500 earnings to come in 7.5% above consensus. That would be lower than the last 3 quarters, but still well above the historical average of a 4% beat.
The prospect of a busy week of data and earnings did little to oil prices. Brent crude was 0.43% higher at $63.23 a barrel on Monday, while WTI crude was up 0.32% at $59.48 a barrel.
US stock futures and the dollar rose on Friday, ahead of a key report on unemployment that will shed further light on the resilience of the economic recovery, although trading volumes were light on account of the swathe of public holidays around the world.
Futures on the S&P 500, the Dow Jones and the Nasdaq 100 rose between 0.1 and 0.4%, suggesting the benchmark indices could see more record highs when they reopen on Monday.
On Thursday, the S&P 500 scorched past 4,000 points for the first time after data showed a sharp rebound in manufacturing activity in March and following President Joe Biden’s unveiling of an infrastructure spending plan worth $2 trillion.
The Bureau of Labor Statistics will publish its nonfarm payrolls report for March on Friday at 8:30 a.m. ET, providing the most detailed look at how hiring fared throughout last month. The backdrop is promising. March had warmer weather, and a faster rate of vaccinations led some states to partially reopen for the first time since the winter’s dire surge in cases. Coronavirus case counts started to swing higher at the end of the month but largely stayed at lower levels.
Democrats’ $1.9 trillion stimulus plan was also approved early last month and unleashed a wave of consumer demand and aid for small businesses. Sentiment gauges surged to one-year highs, and Americans strapped in for a return to pre-pandemic norms.
Consensus estimates suggest March had the strongest payroll gains in six months. Economists surveyed by Bloomberg said they expected nonfarm payrolls to climb by 660,000, which would be nearly double the 379,000 gain seen in February. The unemployment rate is forecast to dip to 6% from 6.2%.
“We believe a vaccine- and reopening-related rebound in labor force participation is likely to start this month, and this could limit the magnitude of the decline in the jobless rate,” Goldman Sachs led by Jay Hatzuis said in a note.
US 10-year Treasury yields held steady around 1.67%, having hit 1.776% last week, their highest in almost 15 months. Bond yields have risen steadily this year, as prices have fallen, in line with a growing conviction among investors that economic recovery is picking up, which will reignite inflation.
The combination of accelerating growth and inflation makes it less attractive to own government bonds.
The dollar meanwhile traded fairly steadily against a basket of major currencies. The dollar index was last down 0.1% on the day, but still holding close to its highest in five months.
“Friday’s highly-anticipated non-farm payrolls report comes out at a bit of an awkward time; for the first time in six years, the April jobs report falls on the Good Friday holiday, meaning that many major markets will be closed,” CityIndex strategist Matt Weller said in a note on Thursday.
“As a result, readers who are at their desks trading the FX or bond markets may see less liquidity than usual and the post-release move may peter out sooner than usual as traders who are watching the markets look to duck out early to enjoy a long holiday weekend,” Weller said.
Bitcoin nudged at $60,000 for the first time in two weeks, as risk appetite pushed investors into more volatile assets. It was last up 1.2% around $59,540, having gained over 8% in the last week.
Borrowing costs as tracked by the 10-year Treasury note yield rose to their highest in 14 months on Wednesday, with investors pricing in expectations of hotter inflation while they cut down high-flying growth stocks.
The yield on the benchmark 10-year Treasury note hit 1.67%, a level not seen since mid-January 2020, before the COVID-19 outbreak was declared a pandemic and before it had accelerated in the US. Yields rise as bond prices drop.
The yield has quickly pushed higher since the start of 2021, from around 0.9%, bolstered by improvement in the world’s largest economy after it and other economies worldwide fell into recession last year.
“What the market is trying to price in is a much more optimistic Fed … that is likely to remain committed to providing more accommodation into this economic recovery,” Ed Moya, senior market analyst at Oanda, told Insider on Wednesday before the release of the Federal Reserve’s economic projections and monetary policy decision at 2 p.m. Eastern.
Along with growth, investors also expect inflation to increase and for the Fed to begin raising interest rates after they slashed them to near zero in March 2020 in response to the health crisis.
The step-up in the 10-year yield, which is tied to a range of lending programs including mortgages, has spurred a pullback in growth stocks, notably large-cap tech stocks, and a rotation into cyclical stocks set to benefit when an economy improves.
“You’re probably going to see that the Fed is still going to be stubborn as far as when that first rate hike is going to happen, but the markets are just going to go ahead and price that in a lot sooner,” said Moya.
There are market expectations that the Fed will begin raising its fed funds target rate in 2023 from the current range of zero to 0.25%. Meanwhile, more fund managers now consider higher-than-expected inflation would be the biggest danger to the market, replacing COVID-19 as the main risk, according to a Bank of America survey for March.
The US economy is expected to recover further with the US government circulating COVID-19 vaccines from three companies — Pfizer and its partner BioNTech, Moderna, and Johnson & Johnson — and with about 111 million people already vaccinated.
“Also, it doesn’t hurt when you have almost $2 trillion in [fiscal] stimulus get done since your last policy meeting,” said Moya, adding that “the economy is likely to run hot for a little bit.”
A steady grind higher of the 10-year yield “is completely healthy,” said Moya.
“But if this pace continues [and] by the end of the month we’re above 2%, that is going to be somewhat disruptive to the economic recovery,” which would likely prompt the Fed to take action, he said. The Fed’s tools include buying more Treasury bonds, he added.
Rising bond yields have triggered sharp falls in the Nasdaq, which is packed full of flashy stocks that soared when returns on bonds were ultra-low. Tesla had tumbled more than 30% over the month to Friday, with Ark’s Innovation ETF down around 26% and Amazon off by roughly 12%.
But why exactly are rising bond yields worrying investors? We asked Scott Thiel, chief fixed income strategist at BlackRock – the world’s biggest asset manager with more than $8 trillion under management – for some answers.
Investors are betting growth will drive inflation
Government bonds – ultra-safe securities that governments sell to borrow money – are the backbone of global markets, with the US Treasury market worth around $21 trillion.
In recent weeks, yields on bonds have risen sharply as investors have dumped government securities at a rate not seen since Donald Trump was elected in 2016. (Yields are the rate of return bondholders can expect, and they move inversely to prices.)
Investors now think economic growth will roar ahead in 2021, causing a rise in inflation. As a result, bond-buyers are demanding a higher return to make up for price erosion and because there are other good investment opportunities. Some investors also think central banks could now start cutting back their support sooner than expected.
The dividend yield on the S&P 500 – how much on average the companies listed on the index pay out in dividends each year relative to their stock price – is around 1.57%, according to Bloomberg data. For the first time since late 2019, 10-year notes are yielding more.
Thiel, who has managed some of BlackRock’s biggest bond funds, sees three key drivers: The arrival of coronavirus vaccines, which will let economies reopen; the Democrats taking control of the US Senate and planning $1.9 trillion of stimulus; and a huge amount of pent-up demand thanks to people saving money during lockdown.
“If you put those 3 things together… it has put the economy on a very aggressive reopening stance,” he says.
Rising bond yields hit company valuations
But why are stock markets nervous when growth is expected to be so strong? Thiel’s explanation can again be broken down into 3 parts.
Firstly, he says “the most important thing to think about” is that bond yields and inflation are key factors in judging what companies are worth.
If borrowing rates and inflation look likely to stay low for a long time, then the returns and earnings of stocks become more attractive. Lower interest rates also hold down companies’ borrowing costs.
Low rates therefore caused a surge in the shares of fast-growing, high-earning companies like Amazon, Apple and Google, helping the Nasdaq soar more than 80% since its March 2020 lows.
But Thiel says: “If you shift that dramatically, in a very short period of time, and imply that that may be just the beginning of rate increases, you can have a situation where equity markets don’t like that very much at all.”
The Fed’s stance has worried investors
This leads to another, related explanation of the market jitters. Investors worry the Fed and other central banks will allow rates to rise, without intervening.
Markets have become used to the Federal Reserve holding down bond yields and pumping money into the economy. But Thiel says the Fed has “basically declined to… hit any kind of alarm button at all” over the rise in borrowing costs.
He says the Fed has in fact signaled “the opposite, which was to say that this was consistent with how they thought the market should play out.”
Kit Juckes of Société Générale said in a note it was “not the message markets wanted to hear”, which triggered another slide in stocks and spike in yields.
Rapid changes catch stocks off guard
Finally, the sheer speed with which bond yields have risen has taken markets by surprise, Thiel says.
Some of the daily moves seen in bond markets were “very, very, very big,” he says. “So I think it was very much a feature of a very quick move that we saw in rates… I think it caught the market a little off guard.”
Goldman Sachs analysts said in a note investors are suffering “indigestion” as they rapidly re-value stocks in light of changing bond prices.
Shane Oliver, head of investment strategy at AMP Capital, said in a note that the rise in yields had triggered a fast rotation “away from last year’s winners like tech stocks, to cyclical shares like financials and resources that will benefit from stronger economic conditions.”
Despite the recent stock-market turbulence, Thiel remains optimistic about the outlook for stocks because the rapid recoveries expected, especially in the US and China.
“We don’t believe that markets are dramatically overvalued at this point,” he says, adding that there’s “a lot of economic growth coming.”
The yield on the 10-year Treasury note reclaimed the 1.5% level on Thursday, hitting again at its highest in more than a year, after Federal Reserve Chairman Jerome Powell indicated the central bank will keep a steady hand in the face of rising inflation.
Powell, in a virtual appearance at the Wall Street Journal Jobs Summit in New York, said he expects the Fed will “be patient” in waiting for inflation to trend above 2%.
The 1o-year yield touched 1.555%, the highest reading since it zoomed past 1.6% a week earlier. That earlier move pushed the yield to its highest level since February 2020 as investors continued to price in expectations for economic recovery from the COVID-19 pandemic and subsequent expectations of hotter inflation. The yield on Wednesday settled at 1.453%. Bond yields rise when prices fall.
The spike in yields points to rising borrowing costs and the move sent US stocks spiraling lower. The Nasdaq 100 lost its gains for the year and the VIX, Wall Street’s so-called “fear index”, soared by nearly 20% before paring the rise to about 7%.
The yield on the two-year note, which can speak to market expectations for central bank policy, edged down to 0.141% from 0.149%.
The army of Reddit day traders appears to be moving on, having pumped up everything from cryptocurrencies, to tiny biotech stocks in the last week, now that their firing up of GameStop, AMC, Nokia and co seems to have mostly run its course.
This coming week, we’ll be looking at the future of Ethereum, the pickup in consumer inflation and what the major forecasters are saying about the outlook for oil, now the price is trading around one-year highs.
The dawning of the age of Ethereum
Another week, another cryptocurrency at a record high. Earlier in the year, it was bitcoin, then XRP, then “meme token” DogeCoin, which got swept up in the Reddit-driven trading frenzy and given an extra shout-out on Twitter by Tesla CEO Elon Musk.
This time, it’s Ethereum grabbing the headlines. The second-largest cryptocurrency by market value after bitcoin has seen the price soar by more than 25% this week to record highs above $1,600. It’s not just down to the Wall Street Bets guys, either. Exchange operator CME group will launch its first Ethereum futures contract on February 8, another offering in the crypto market alongside its bitcoin futures and options.
At the same time, crypto fund manager Grayscale reopened its Grayscale Ethereum Trust, after having closed the fund to new investors in late December for “administrative purposes.” In this week alone, the trust has seen inflows of nearly 100,000 ETH. Grayscale now manages nearly $5 billion in Ethereum.
JPMorgan estimates that initial volumes in Ethereum futures are likely to be low, much like bitcoin in the early days, but this will change quickly.
“The listing of CME bitcoin futures coincided with all-time highs in bitcoin prices, and researchers at the San Francisco Fed suggested that, by providing a market where bearish positions could be more readily expressed, the listing of these futures contributed to the reversal of bitcoin price dynamics,” JPMorgan analysts led by Nikolaos Panigirtzoglou said in an note last week.
“In a similar vein, it may be that this week’s listing of ethereum futures contracts will be followed by negative price dynamics by enabling some holders of physical ethereum to hedge their exposures,” they said.
The oil price hit its highest in a year this past week, leaving Brent crude futures trading just shy of $60 a barrel. The catalyst for the rally wasn’t the Reddit crowd, but ongoing evidence of the rollout of COVID-19 vaccines in the UK and US in particular that many hope will pave the way out of lockdowns and into more normal activity.
The futures market shows traders and fund managers are more optimistic about the prospects for oil demand than at any time in the last year. The most recent data on oil inventories shows stocks of unused crude are at their lowest since last April, when a frenzied scramble for storage led to the WTI crude futures price dropping to -$40 a barrel.
This coming week, the three major forecasters will release their most recent assessments of demand and their estimates of demand growth. OPEC, the International Energy Agency and the US Energy Information Administration will release their regular monthly reports.
The EIA, which issues longer-term demand forecasts, expects to see the global crude market tilt into a modest deficit over 2021 as a whole, with consumption forecast at 97.77 million barrels per day, against supply of 97.13 million barrels per day. The IEA expects demand to grow by 5.5 million bpd, following a record contraction of almost 9 million bpd last year, while OPEC is looking for a more optimistic 5.9 million bpd.
OPEC and several partner countries continue to restrict daily oil production to keep a safety net under the price. Investment bank UBS says the group will remain “in full control of the oil market” this year and this, together with the advent of an effective vaccine, means the price of a barrel of crude will continue to rise.
“Given that we target Brent at $63 a barrel in 2H21, we continue to advise investors with a high-risk tolerance to be long Brent or to sell its downside price risks,” UBS strategist Giovanni Staunovo said in a note last week.
Inflation and, more to the point, the market’s expectations for inflation, is creeping up. A combination of increases in the price of things like oil and food, as well as vast amounts of cash flowing through the financial system are slowly translating into a pickup in consumer inflation. But this isn’t necessarily a bad thing, analysts say.
The oil price is at its highest in a year, while food prices – as measured by the United Nations’ Food and Agriculture Organization – rose by more than 4% in January to hit their highest since mid-2014. Central banks generally use inflation measures that strip out food and energy prices when setting monetary policy, but that hasn’t stopped investors from betting on more increases to come.
Pumping up inflation
This coming week brings inflation readings from the US and China, as well as Brazil, India, and Mexico among others. In the US, consumer inflation is forecast to have risen by 1.5% in January, at the same rate as in December. The bond market shows investors believe consumer and producer price pressures are going to continue rising.
Analysts at DataTrek said in a note last week US five-year Treasury Inflation-Protected Securities (TIPS) have done “a reasonable job” of forecasting the stable rate of inflation seen in both producer and consumer prices over the last decade.
“The most recent move higher for 5-year inflation expectations (2.18%, the highest since 2013) is therefore significant,” DataTrek analyst Nicholas Colas said.
“Importantly, TIPS are NOT saying rampant inflation is just around the bend. The 2.2% forecast embedded in those bond prices is simply a validation of the idea that the US will see a reasonable and lasting economic recovery in the years ahead,” he added.
The so-called breakeven inflation rate – derived by subtracting the yield of the five-year TIP from that of the nominal five-year Treasury note – has risen to 2.25% this week, its highest in almost eight years, having doubled in the space of eight months.
“While the chatter around the inflation outlook is elevated now, we would expect it to become even more intense as we approach mid-year if our CPI forecasts are right,” strategists Ralph Axel and Olivia Lima at Bank of America wrote last week. They forecast a consumer price inflation (CPI) rate of 3.4% by May, which might prompt investors to revise their view on when the Federal Reserve may begin to tighten monetary policy – but they add a caveat.
“History shows that markets tend to overreact to positive developments and price in hikes long before the Fed actually delivers,” they said.
The army of Reddit retail traders is still active, but it would appear most have booked profits on their positions in the likes of GameStop and AMC – GameStop is now worth just over half of what it was at the height of the Wall Street Bets frenzy one week ago.
China’s CSI 300 rose 0.17% overnight, finishing the week in the green, as the strong economic recovery outweighed worries over rising short-term credit costs. Japan’s Nikkei 225 jumped 1.54% on upbeat earnings and stimulus hopes.
The Europe-wide Stoxx 600 index rose 0.42% in early trading, while the UK’s FTSE 100 climbed 0.11%.
Investors have been pulled in different directions in recent weeks. Hopes that vaccines and stimulus will power a strong recovery in 2021 have clashed with short-term economic pain and a day-trading frenzy that shook markets at the end of January.
But better-than-expected economic data from the US has sparked new optimism that the recovery will be a powerful one.
The Bank of England on Thursday cut its short-term growth forecasts because of January’s lockdown. But it said the country’s speedy coronavirus vaccine rollout “should help the UK economy recover rapidly later this year.”
Adding to the general mood of optimism, Democrats in Congress are powering ahead with plans to pass a $1.9 trillion stimulus package without Republican approval.
Investors’ attention Friday will be on the official monthly US employment report, due at 8:30 a.m. ET. Economists at Daiwa expect a modest 50,000 increase in payrolls, following a 140,000 decline in December. Yet they said in a note that recent data suggested the figure could be better than expected.
Oil prices have soared this week as the economic outlook has brightened, with investors betting demand will rise. Brent crude was up 1.12% on Friday morning to $59.66 a barrel, its highest level since last February. Brent has gained more than 7% this week, its largest weekly increase in a month. West Texas Intermediate crude was 1.42% higher at $57.03 a barrel.
“With inflation sentiment rising in the US, partially due to higher government borrowing, adding a tailwind to the economic recovery, the conditions still remain supportive for oil markets,” said Jeffrey Halley, a senior market analyst at the currency firm Oanda.
The dollar index slipped back from its highest level since December. It was last down 0.16% to 91.39.
A strong pound, after the Bank of England suggested negative interest rates were not likely anytime soon, added to greenback weakness. The pound was up 0.21% to $1.37 on Friday after jumping Thursday.
US bond yields were little changed. The yield on the 10-year Treasury note was roughly flat at 1.139% but continued to trade near its highest level since March, reflecting stronger growth and inflation expectations. Yields move inversely to bond prices.