Inflation remains the big story right now and, while US policymakers seem unperturbed, investors are watching this data like a hawk.
Markets remain in a holding pattern ahead of the next economic release, which could serve to reignite the inflation debate.
Tomorrow’s Consumer Price Index reading in the US is expected to reveal that the total annual inflation rate rose to 4.7% and core inflation to 3.4%, above the Federal Reserve’s target of 2%. Certainly, any numbers above these levels would draw comment from the Fed, who otherwise fully expect inflationary pressures to diminish over the coming months.
This in turn would lessen the requirement to tone down the monetary easing programme, kicking the likelihood of an imminent interest rate rise into the long grass.
However, this would also come after Chinese inflation readings which showed strong gains in consumer and producer prices, prompting more concerns that the inflation picture globally is under upward pressure.
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Having borne the brunt of the rotation out of large growth stocks, the Nasdaq index has regained some poise, with selective buying of the bigger tech names. While the index is around 2% lower than the record high it posted in April, it nonetheless remains up by 8% in the year to date. Meanwhile, the major indices have continued to grind higher and not far away from new record highs, with the Dow Jones having added 13% and the broader S&P 500 12.5% so far this year.
The oil price has continued its march higher as further evidence of increasing demand emerges.
There are signs of more cars on the road in developed economies as restrictions ease, and it is expected that the traditional driving summer season in the US will be stronger than usual given the pent-up demand of people wishing to travel. Although the return to overseas travel remains some way off, for the larger continents the possibility of domestic airline flights is another potential boost to demand. The oil price has now risen by 40% in the year to date, largely in anticipation of this expected spike in demand.
The UK’s premier index has also been affected by renewed inflation jitters, and the strength of sterling in the background is also serving to cap recent progress. The FTSE 100 nonetheless remains ahead by 9.5% in the year to date, with the more domestically focused FTSE 250 reaping the benefit of a recovering and hitherto robust UK economy, having added 11.6%.
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