European stocks are pushing higher today, hitting fresh all-time highs after a strong close on Wall Street. Bond yields are moving lower as investors digest the largest rise in US core inflation in 30 years.
Yes, that’s right! Bond yields are falling despite US CPI coming in higher than forecast at 5% in May. That is up from 4.2% in April. Core inflation, which excludes volatile items such as food and fuel, jumped to 3.8% YoY in May, up from 3% in April, and topping expectations of 3.4%. Investors saw sufficient evidence of one-off factors in the CPI data to support the Fed’s stance that the spike in inflation is transitory. Ironically, the higher than forecast inflation print was actually a tonic for the markets.
It is fair to say that high inflation prices are pretty much fully priced in, as is the reaction by the Fed. The Fed has been consistent and unwavering in its message, which has also soothed the markets. Add into the mix, the dovish reassurance from the ECB, and markets are relaxed that the stimulus high that they have been running on, won’t be taken away just yet.
The FTSE is outperforming its peers today after UK data revealed that the economy gained momentum in April. UK GDP rose 2.3% MoM in April, up from 2.2% in March, as shops, hairdressers and outdoor hospitality reopened, although manufacturing and construction output were unexpectedly weak. Even so, the data means that output is just 3.7% off its pre-pandemic level.
The successful vaccination programme has helped the economy bounce back from its deepest contraction in 300 years last year. With households expected to splurge the savings amassed over that time, and businesses gearing up for additional investment, the outlook is certainly bright. There is, of course, the complication of rising cases of Covid-19, which could delay the final stage of reopening. For now, a return to pre-Covid output in Q4 looks to be very much on track.
Looking ahead, US futures are pointing to a mildly stronger start on follow-through buying as the upbeat mood continues. US consumer confidence is the highlight of the US economic calendar today and could boost sentiment further.
FX – US dollar tiptoes higher, ECB drag on the euro
The US dollar is seeing a tepid bounce after edging lower in the previous session. Investors felt confident that the rise in inflation was not sufficient to prompt an earlier move by the Fed. Price rises in airline tickets and used cars supported the Fed’s view that the spike in prices was transitory.
The euro is edging lower, extending mild losses from the previous session. The main takeaway from the ECB is that ultra-easy monetary policy is here to stay. Christine Lagarde pledged to keep the faster pace of bond buying in place despite upwardly revising both growth and GDP forecasts.
What is clear from both the Fed and the ECB is that data is driving policy decisions, rather than forecasts.
