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LGT Navigator: Stock markets and central banks remain relaxed despite sharp rise in US inflation

June 11, 2021

The latest data from the US showed stronger-than-expected inflationary pressures, fueling investor concerns about an earlier and sharper response from central banks, or rising interest rates. In Europe, however, the ECB is sticking to its expansive monetary policy course and did not signal an immediate turnaround on the occasion of yesterday's interest rate decision.

Stock markets and central banks remain relaxed despite sharp rise in US inflation

On Wall Street, investors were surprisingly relaxed despite the stronger than expected rise in US inflation. On the one hand, the increased inflation expectations are likely to have already been factored in, and on the other hand, investors seem to believe the central banks that the rise in inflation will only be of a temporary nature. The Dow Jones Industrial held roughly at the previous day's level and closed at 34'466.24 points (+0.06%), while the S&P 500 gained +0.47% to 4'239.18 points. Stronger was the appetite of equity investors on the Nasdaq technology exchange, where the indices rose by up to +1%. In Asia, a friendly stock market mood prevailed in the majority at the end of the week and the futures point to a positive start to trading in Europe.

At the same time benchmark government bond yields have tumbled this week. The ten-year US Treasury yield fell the most since June 2020, and touched a three-month low of 1.43% today. 

Strongest rise in inflation rate in the US since August 2008

The cost of living in the United States rose even more sharply in May than economists had expected. This continues the price trend that has been observed for some time, putting the Federal Reserve under increasing pressure to abandon its expansionary monetary policy stance. According to the latest data, consumer prices rose by +5% year-on-year in May - the highest rate in almost 13 years. In April, inflation had been +4.2% and analysts had expected it to rise to +4.7%. On a monthly basis, consumer prices rose by +0.6%. The core rate, i.e. excluding energy prices, climbed from +3.0% in April to +3.8% in May (consensus +3.5%).

ECB remains on course

As expected, the European Central Bank (ECB) left its key interest rates unchanged at record low levels. Although signs of a further, albeit possibly bumpy, economic recovery in the euro area seem to be progressing thanks to ongoing vaccination campaigns and openings, the ECB remains in crisis mode. In addition to key interest rates, forward guidance and the EUR 1.85 trillion Pandemic Emergency Purchase Programme (PEPP) to combat the economic consequences of the pandemic remain unchanged. At the same time, ECB President Christine Lagarde was relaxed about the recent rise in inflation. This was mainly due to temporary factors, Lagarde said at the press conference. Overall, inflation remains far from the ECB's target (close to 2%). However, the ECB is keeping a close eye on developments, the central bank chief stressed.

Higher inflation expectations also reflected in ECB forecast

In its revised forecasts, the ECB assumes somewhat stronger economic growth, but also higher inflation in the euro area. In the current year, the gross domestic product of the euro countries is expected to increase by +4.6%. In April, the central bank had still forecast a growth rate of +4.0%. GDP is also expected to grow more strongly in 2022, namely by +4.7% (previous forecast +4.1%). At the same time, however, the ECB is also holding out the prospect of higher inflation. Consumer prices are expected to rise by +1.9% this year (previously +1.5%) and by +1.5% in 2022 (+1.2%).

Economic Indicators June 11

MEZ Country Indicator Last period
08:45 FR Consumer Prices (May, y/y) +1.4%
09:00 SP Consumer Prices (May, y/y) +2.4%
16:00 US Consumer Confidence University Michigan (June) 82.4


Earnings Calender June 15

Country Company Period
SWE H&M Q2 Sales
US Oracle Q4


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