Inflation Officially No Longer Transitory

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09/12/2021
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Inflation Officially No Longer Transitory

Federate Reserve chair Jerome Powell took his first opportunity to address Congress since his re-nomination to acknowledge that inflationary pressures were broad and long lasting enough for the word transitory to be retired[1]. Pressures are still expected to abate next year; however they remain elevated to the extent that the central bank may consider accelerating the tapering of its monthly bond purchases. US equities, particularly growth stocks, experienced sharp falls, while the yield curve flattened by the largest amount since the height of the Covid-19 crisis, suggesting investors expected more near term rate hikes but for this to bring inflation under control in the medium term. The tech-heavy NASDAQ fell -1.75%, followed by the S&P 500, down -0.32%. The Dow Jones Industrial Average, with a greater exposure to financials and cyclicals, seen as potential beneficiaries of an inflationary environment, was flat (+0.06%).

European and Asian markets eked out gains, with the FTSE 100 (+1.16%) and French CAC40 (+1.00%) delivering modest rebounds following steep declines the week before, while the German DAX (-0.01%) was flat for the week. Several European countries have already taken measures to deal with the spread of the Omicron variant, with Germany tightening restrictions on unvaccinated persons while Portugal and France reintroduced mask wearing requirements[2]. China lagged despite a positive surprise from the official manufacturing PMI[3], with the MSCI China falling -2.01%. Kaisa Group became the latest Chinese property developer to come close to default, as it failed to receive bondholders approval to extend the maturity of a $400m note[4].

 

Week Ahead

The UK is quiet on the data front this coming week, with the main release being the monthly GDP reading. Inflation data from the US will be a focal point for investors as it is released this Friday, with expectations for another steep monthly rise. Data releases from the Eurozone are also limited; revised GDP and final employment data are the standout publications. Finalised Japanese quarterly GDP and inflation data is expected on Tuesday, while producer price inflation will be released on Friday. The headline publication from China will be the consumer and producer price inflation readings coming on Wednesday. [5]

 

[1] Federal Reserve - Coronavirus and CARES Act - 30.11.21

[2] CNBC - 03.12.21

[3] China Federation of Logistics and Purchasing - 30.11.20

[4] Bloomberg - 02.12.21

[5] ForexFactory - 11.12.21

 

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