Market Update

Yesterday's release of US CPI inflation data took center stage this week, and as we predicted in our previous market update, the inflation figures, while showing a significant year-on-year increase, ultimately had little lasting impact, with most major global equity markets ending the week slightly higher.
The headline US CPI inflation rate for May, which came in at 5.0% (up from 4.2% in April), certainly grabbed attention. However, as we had anticipated, it turned out to be a case of much ado about nothing. Several factors contributed to this increase, including distortions from last year's commodity and used car prices. Used car prices, for instance, surged 7.3% in May alone due to ongoing semiconductor supply chain disruptions affecting new car production. Other categories associated with the economic reopening, such as airfares (up 7.0% in May) and clothing, were among the biggest contributors to the rise in inflation.
A closer look at year-on-year increases reveals that petrol prices are 56.2% higher, energy prices are up 28.5%, used car prices have risen by 29.7%, airfares increased by 24.1%, and food away from home (e.g., restaurants) saw a 4.0% rise. In contrast, categories not linked to economic reopening, like food at home (cereals, meat, dairy, fruits & vegetables), alcohol, and housing (rent), showed more modest inflation figures, with year-on-year increases of just 0.7%, 1.6%, and 1.8%, respectively.
Consequently, the recent inflation data further reinforces our belief that market concerns about runaway inflation leading to significantly higher interest rates are unfounded. We see the current inflationary pressures as temporary, likely to fade, and thus expect central banks like the Fed, BoE, ECB, and BoJ to maintain accommodative monetary policies by keeping interest rates low.
Furthermore, data from the University of Michigan released early today (Friday, June 11, 2021) indicated that American consumers are also leaning toward the view that the current inflation uptick is transitory. This is a positive development because it suggests that high inflation expectations won't become deeply entrenched. Inflation expectations for both the near term (1 year) and longer term (5-10 years) declined to 4.0% (from 4.6%) and 2.8% (from 3.0%), respectively.
In other developments, the European Central Bank (ECB) kept Eurozone interest rates unchanged as expected. Although their inflation forecasts for 2021 and 2022 were significantly revised upward to 1.9% (from 1.5%) and 1.5% (from 1.2%), respectively, the ECB also seems to believe this inflation surge is transitory, as their 2023 forecast remained unchanged at 1.4%.
Looking ahead to the coming week, there are monetary policy meeting announcements and press conferences scheduled by two central banks, the Fed and the BoJ. While both events will receive significant attention, major surprises are not anticipated.
Regarding economic data releases, the upcoming week will feature UK employment data, including the unemployment rate and weekly earnings. Additionally, we'll see UK and Japanese CPI inflation figures, along with US, UK, and Chinese retail sales data, US and Eurozone industrial production numbers, and US housing data.