Resilient stock market & lower yields despite rising inflation

Week from 7 to 13 June 2021

All eyes were on the latest CPI (consumer price) data this week. After climbing to 4.2% year-on-year in April, it accelerated 5.0% in May, above expectations (+4.7%). In a word, this is the biggest increase since August 2008. At the same time, jobless claims fell to their lowest level since the beginning of the pandemic. Most equity indices extended their winning streak while Treasury yields dipped, shrugging off a higher-than-expected rate of inflation. One could think that financial markets have gone nuts. In fact, they are now betting on the Fed’s inflation narrative (i.e. “temporary” jump in prices) after raising doubts in the past few months.  

S&P 500 At New Record High 

Stock markets remained bullish ahead of the next Fed meeting on June 15-16. The S&P 500 closed at another record on Friday (4,247.44 or +0.41% week-over-week). The tech-heavy Nasdaq Composite gained 1.85%. Megacap tech indeed continued to outperform (Microsoft up 2.83%, Google up 2.54%) helped by weaker U.S. bond yields. By contrast, the Dow Jones Industrial Average was down 276.79 points, or -0.80%. Small-cap stocks beat their large-cap counterparts (Russell 2000 up 2.16%).

Five of the 11 major S&P sectors slipped. Falling yields first hit financials (-2.38%). Other cyclical sectors also lost ground (materials down -2.02%, industrials down -1.73%). Energy paused (-0.57%) though crude oil prices pushed higher (WTI up 1.85%) as easing travel restrictions could boost demand in the coming summer months. On the flip side, the defensive sectors such as real estate (+1.95%), utilities (+1.09%), and healthcare (+1.93%) ended in the green. As regards the latter, biotech stocks shined with a surge in Biogen (+38.62%!) after the Food & Drug Administration approved its Alzheimer drug. Information technology (+1.38%) and consumer discretionary (+1.62% as Amazon jumped 4.39%) also kept the broad market trend higher.

European stock markets kept going up (MSCI EMU: +1%) as the economic recovery is gathering speed. The European Central Bank met on Thursday. Unsurprisingly, it upgraded its inflation and growth projections for 2021 and 2022 but did not say a word about tapering.

In Asia, Japanese and Chinese equity indices treaded water (Nikkei: +0.02%, Shanghai Composite: -0.06%). Elsewhere the benchmark indices were up over the week (Korea’s Kospi: +0.29%, Australia’s S&P/ASX 200: +0.23%, TWSE Taiwan 50: +0.39%, India's blue-chip Nifty 50: +0.82%).

Bond Rally, Dollar Index Firmer, Gold Weaker

Easing concerns about inflation led traders to scale back their bearish bets on Treasuries. The yield on 10-year T-notes closed at +1.46% (lowest level since early March). The 10-year German bond yield slid from -0.21% to -0.27%. 

Against this backdrop, investment grade corporate bonds gained momentum (+0.51% in the U.S., +0.26% in Europe). High-yield bonds followed suit (+0.34% in Europe, +0.42% in the U.S.) like emerging debt (+0.29% in local currencies), in spite of a stronger greenback (dollar index up 0.47%).

Spot gold prices fell marginally to $1,877.5 per ounce.

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