Markets mostly up as inflation spike seen as temporary

Most Asian and European markets rose Friday following a record lead from Wall Street as traders bought into the Federal Reserve narrative that surging US inflation was only temporary and the central bank was likely to maintain its ultra-loose monetary policies for some time.

The keenly awaited US consumer price index for May came in at a forecast-busting five percent annually, well up from April and the highest in 13 years owing largely to a spike in energy costs and the low base of comparison with 2020.

The three main New York indexes initially fell on the announcement before rebounding, with analysts pointing out that prices rose less than expected on a monthly basis.

There has been a growing concern that the blockbuster recovery in the global economy — supported by stimulus, reopenings and vaccinations — will send inflation soaring and force central banks to taper their market-boosting monetary policies, which include record-low interest rates.

However, observers said that while those fears linger, the Fed’s insistence that the expected jump in prices will only last a few months appears to be getting through with the yield on benchmark 10-year Treasuries — a key gauge of future borrowing costs — at their lowest since March.

“The frothiness in CPI continues for now but between base effects and pent-up demand pressures, it is probably not giving a definite answer to the great inflation debate, and you need to read the bond market tea leaves,” said Anu Gaggar, of Commonwealth Financial Network.

“The bond market is falling in line with the Fed’s thinking that inflation is transitory and does not warrant tapering of monetary stimulus any time soon.”

Markets strategist Louis Navellier added: “Parsing of words from the (Fed’s policy committee) in the upcoming weeks will take on more importance than ever.”

– Warning for Fed –

On Wall Street, the Dow and Nasdaq both enjoyed healthy gains, while the S&P 500 hit an all-time high as taper worries subside for now.

The gains were also helped by the European Central Bank’s decision to stick to its guns, with boss Christine Lagarde saying it would be “too early and premature” to discuss tightening monetary policy, even as officials lifted their annual inflation outlook.

In Asia, Hong Kong, Sydney, Seoul, Singapore, Mumbai, Wellington, Bangkok, Taipei and Manila all rose, while Tokyo was flat, and Shanghai and Jakarta dipped.

London rose after data showed Britain’s economy expanded 2.3 percent in April as the government eased lockdown measures and people slowly returned to some form of normality. Paris and Frankfurt also rose.

Still, there remains a debate about how long the high readings will last and when the Fed will consider it time to act.

“So far the Fed has doubled down on ‘transitory’ inflation, but with each new economic report, this position becomes more tenuous,” Naveillier added.

“The Fed, ever sensitive to investor sentiment, may decide that letting air out of the tire slowly and embracing the advent of inflation, will allow them to walk the tight rope a little longer.”

And Fidelity International’s Salman Ahmed warned there were signs that high inflation could be more long-term. 

“Both the magnitude of upside surprises and the duration of the current high inflation phase will matter when it comes to justifying the current highly accommodative easing stance,” he said in a commentary.

“Our bottom-up analysts identified the current momentum we are seeing in inflation a number of months ago and are reporting continued supply side disruptions and labour shortages whilst at the top-down level we see more supply demand mismatches, increasingly leading us to question the Fed’s transitory mantra.”

Traders will this weekend be keeping an eye on the summit of Group of Seven in Cornwall — marking the start of Joe Biden’s first foreign trip as president — where they have pledged to donate a billion vaccines for the world’s poorest countries, while other issues will be on the agenda including China and the climate.

– Key figures at 0720 GMT –

Tokyo – Nikkei 225: FLAT at 28,948.73 (close)

Hong Kong – Hang Seng Index: UP 0.4 percent at 28,841.77

Shanghai – Composite: DOWN 0.6 percent at 3,589.75 (close)

London – FTSE 100: UP 0.2 percent at 7,103.47

Euro/dollar: UP at $1.2189 from $1.2176 at 2040 GMT

Pound/dollar: DOWN at $1.4165 from $1.4177

Euro/pound: UP at 86.03 pence from 85.87 pence

Dollar/yen: UP at 109.34 yen from 109.32 yen

West Texas Intermediate: DOWN 0.1 percent at $70.25 per barrel

Brent North Sea crude: DOWN 0.1 percent at $72.47 per barrel

New York – Dow: UP 0.1 percent at 34,466.24 (close)