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LGT Navigator: Inflation, the increasing risk factor

February 19, 2021

On capital markets, the scenario of a potential return of inflation currently remains the main topic of discussion. Will a possibly strong recovery of the global economy following the corona crisis driven by the massive fiscal stimulus packages coupled with ultra-expansionary monetary policy fuel inflation and thus on the one hand push up bond yields and on the other hand put rich valued equities under pressure? Signs are there, but it seems premature to read any real evidence.

Inflation, the increasing risk factor

Against this background, investors will increasingly look at the economic and price data. The economic figures from the US presented yesterday were mixed. On the one hand, the prices of goods imported into the US increased more than expected at the beginning of the year, on the other hand, the business climate in the Philadelphia region clouded in February and the number of initial jobless claims increased surprisingly last week. On Wall Street, inflation fears and price losses in tech stocks were the focus. The Dow Jones Industrial closed -0.38% lower at 31,493.34 points and the S&P 500 lost -0.44% from the previous day to 3,913.97 points. The tech select index Nasdaq 100 fell -1.6% at times and ended Thursday's trading session with a loss of -0.45% at 13,637.51 points. At the same time, the yield on ten-year US government bonds climbed to as high as 1.32%.

On the corporate side, the quarterly result of Walmart was also in focus. Although the world's largest retailer benefited from a booming online business, but was also burdened by high costs, which ultimately led to a quarterly loss. The share was then burdened primarily by a subdued business outlook. The share fell by -6.5%.

US economic data provide light and shadow

The much-watched Philly Fed industrial index from the Philadelphia branch of the Fed fell back to 23.1 points in February from 26.5 points in the previous month, indicating a slight weakening of the recovery trend. However, analysts had expected an even steeper decline to 20.0 points. Like, for example, the Empire State index of the New York Fed, the regional business climate barometer is intended to provide information on the national trend in US industry. The number of initial claims for unemployment benefits in the US rose more than expected last week by 13,000 to 861,000 applications. Analysts, on the other hand, had expected a sharp decline to 773,000. The situation on the US labor market thus remains tense. Currently, just under 4.5 million Americans are claiming unemployment benefits. Conflicting signals also came from the real estate market. On the positive side, building permits, which are a key indicator of future construction activity, rose more strongly than anticipated. In January, these rose by 10.4% versus the previous month (consensus +1.4%). At the same time, however, housing starts declined by -6% on a monthly basis (consensus -0.5%).

ECB is (still) relaxed with regard to the inflation trend

According to the minutes of the last European Central Bank (ECB) Governing Council meeting on January 21, published yesterday, Council members believe that the growth outlook for the euro area has hardly changed despite new measures to curb the corona pandemic. Also discussed was the rise in short-term nominal interest rates. According to ECB chief economist Philip Lane, this development needs to be closely monitored. When it comes to inflation, however, the ECB is nevertheless relaxed: A temporary rise in inflation should not be confused with a sustained one, which is likely to be very slow, the central bank commented.

Pandemic control at the center of the G7 summit

At the online meeting of the Group of Seven major economic powers (G7) starting today, the main focus will be on the corona crisis and its containment. An important role will be played by vaccination campaigns, which are to be coordinated more closely. The presidency is currently held by Great Britain. For the first time, the new US President Joe Biden will also take part. He certainly wants to re-establish the US as a reliable partner for the other G7 countries Germany, UK, France, Italy, Canada and Japan.

 

Economic Indicators February 19

MEZ Country Indicator Last
08:00 UK Retail Sales (January, y/y) +2.9%
08:45 FR Consumer Prices (February, y/y) +0.8%
09:15 FR IHS Markit PMI Composite (February) 47.7
09:30 GE IHS Markit PMI Composite (February) 50.8
10:00 EZ IHS Markit PMI Composite (February) 47.8
10:00 IT Consumer Prices (February, y/y) -0.3%
10:30 UK IHS Markit PMI Composite (February) 41.2
15:45 US IHS Markit PMI Composite (February) 58.7
16:00 US Existing Home Sales (January, m/m) +0.7%

Earnings Calendar February 19

Country Corporate Period
SZ Swiss Re Q4
SZ Sika Q4
GE Allianz Q4
FR Danone Q4
FR Renault Q4
IT Eni Q4
US Deere & Co Q4

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, +41 44 250 78 59, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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