Supply is struggling to match demand, which is causing problems. Here's what our head of markets thinks.
The welcome return to economic growth continues to be tempered by fears of rising prices, as elements of supply and demand remain out of kilter.
Such inflationary concerns will be revisited after the release of the non-farm payrolls number later today. There is a clear consensus that the reading will be significantly higher than last month’s unexpectedly low figure of 266,000, but there is also a particularly wide spread on what it might be, ranging from 650,000 to 750,000.
A particularly strong reading would reignite the debate on monetary policy. While the Federal Reserve continues to maintain its view of inflation as a passing phase, there are nonetheless suspicions that the voices for the tapering of Quantitative Easing – if not interest rates – are becoming louder.
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As such, growth stocks have again found themselves in the eye of the storm, especially big technology firms where the tech-focused Nasdaq index has been under renewed pressure. The index still remains ahead by 5.6% in the year to date, although some way off the 14,000 level breached earlier in the year.
Even so, the cautious optimism of what is undoubtedly an improving economic situation has enabled the other major indices to maintain progress over the last week, with the Dow Jones ahead by 13% and the S&P 500 by 11.6% so far this year.
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The UK is also at something of an inflection point.
On the one hand, recent economic data is pointing to a burgeoning recovery, as evidenced by strong manufacturing and services sector readings, with the UK’s leading position in its vaccination rollout enabling the release of some pent-up demand.
At the same time, however, this very growth is also putting pressure on supply, where imbalances are beginning to emerge in the face of labour and raw material shortages. What's more, the government’s additions to the amber and red travel lists has dealt another blow to the beleaguered airline and tourism sectors, while doubts over the 21 June release date - when all remaining restrictions in England are due to be lifted - is another potential headwind.
Even so, the UK is well placed in the face of a return to cyclical growth and, on valuation grounds, is still largely regarded as a favoured destination for investors. The FTSE 100 remains ahead by 9.3% in the year to date and the more domestically focused FTSE 250 by 11.2%, with the prospect of further gains for both as the inflationary picture becomes clearer.
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