Market Update

The focal point of this week has been singular: inflation, chiefly triggered by Wednesday's (May 12, 2021) release of the 4.2% US Consumer Price Index (CPI) inflation figure.
Although this CPI reading initially unsettled equity markets, as we emphasized in our previous market commentary, this inflation data was, in our view, much ado about nothing. Consequently, equity markets, as illustrated in the accompanying table, concluded the week lower. However, it's worth noting that equities rebounded significantly towards the week's end, recovering a substantial portion of their earlier losses.
To avoid reiterating our previous market commentary, we maintain the stance that this week's US CPI reading essentially confirmed what we already knew and had been cautioning against: the year-on-year inflation figures in the upcoming months will surge rapidly (owing to the "base effect" as last year's price declines are replaced by higher 2021 prices) before gradually diminishing.
Interestingly, today's (May 14, 2021) University of Michigan's Consumer Sentiment Index showed that consumers' inflation expectations for the next 5-10 years had increased, albeit returning to pre-2008/9 financial crisis levels. This reinforces our belief that inflation expectations remain anchored, giving the Federal Reserve room to look beyond the anticipated CPI increases in the next few months.
In other developments, while data indicated that the UK economy contracted by 1.5% in the first quarter of 2021, it grew by 2.1% in March. This suggests the potential for a robust recovery in the second quarter as lockdown restrictions are eased, and the UK economy reopens.
Looking ahead to the upcoming week, we anticipate data releases including PMI data for the US, UK, and Eurozone; UK employment figures (unemployment rate and weekly earnings); CPI inflation data for the UK and Japan; Q1 GDP figures for the Eurozone and Japan; retail sales figures for the UK and China; and Chinese industrial production.
Additionally, we await the release of minutes from the Federal Reserve's last monetary policy meeting, held on April 28, 2021, as well as speeches from various Fed policymakers.