Market snapshot: this inflation data will test the nerves

The inflation debate won't go away, and investors are watching for signs the economy is overheating.

Further signs that the US economy is beginning to run hot prompted another switch into value stocks, at the expense of growth.

Jobless claims fell again to the lowest level since March of last year, while the annualised rate of economic growth was reported to be running at 6.4%. In addition, it is expected that President Biden will be seeking a new and significant further boost to fiscal spending ahead of the imminent White House budget announcement.

In the meantime, inflationary nerves will be tested once more as the Commerce Department releases the PCE, or Personal Consumption Expenditures, index later today. The measure tends to be one which the Federal Reserve monitors closely and is more influential in deciding Fed policy than the more obvious Consumer Price Index.

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Inflationary concerns continue to bubble under the surface. Although in abeyance for the moment, this could be short-lived as the economic data continues to point towards excess demand as growth kicks in, with supply struggling to keep pace. As such, a further switch into cyclical, value stocks underpins a flip-flop from investors trying to position themselves for all eventualities.

Despite this delicately balanced sentiment, the major indices continue to grind higher, with the Dow Jones ahead by 12.6% and the S&P500 by 11.8% in the year to date. The Nasdaq has generally had a stronger week, but is off its highs from earlier in the year and stands up by 6.6% in 2021.

Switch to UK cyclical stocks

The renewed consideration of cyclical stocks as an investment destination has generally played into the hands of the FTSE 100, which has now risen by 9% in the year to date. The index is replete with sectors falling into the recovery category, such as the banks, oils and miners.

For the likes of the airlines and the hospitality sectors, however, the outlook remains rather more cloudy as both travel restrictions and the emergence of Covid-19 variants hinder a smooth return to some sort of normality.

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Forthcoming weeks will provide further colour as to whether inflation is becoming entrenched or whether it is indeed transitory as the Fed insists. This will bring with it the likelihood of both market volatility and the waxing and waning of investor sentiment as the true picture emerges.