US stocks rallied to a fresh record high after investors realized the punchbowl of stimulus is not going away anytime soon. In fact, stimulus will overflow through the summer as hot inflation in the US still looks transitory and as the ECB keeps a faster pace of bond-buying while showing hesitance to begin exit talk. The S&P 500 rallied 0.6% to a record high but pared gains after failing to break through the 4,250 price barrier.
The inflation playbook heading into the summer is holding up nicely. Wall Street saw the writing on the wall that pricing pressures were going to surge. A stronger-than-expected inflation report initially sent the 10-year Treasury back above the 1.50% level. Shortly after the key inflation reading of the week, the ECB raised their 2021 inflation forecast from 1.5% to 1.9%. The US stock market continues to benefit from improving economic data, potentially transitory inflation, and no end in sight for stimulus domestically and over in Europe.
Consumer prices surged 5% year over year in May as the reopening of the economy accelerates. Core inflation, which excludes food and energy prices, rose from 3.0% to 3.8%, the largest increase in nearly three decades. Used car index continues to account for a good chunk of those gains and that will normalize once the chip shortage problem is rectified. The used car market is still so hot that some dealers are offering to buy back recently sold cars at a higher price.
Worker filings for initial jobless claims continue to trend lower as employers struggle to fill open positions. Continuing claims remained elevated but that should start to end once extended unemployment benefits start to end across half the country.
Real average weekly earnings in May fell deeper into negative territory, while hourly earnings modestly improved. Given the distortion in the labor market, investors are ignoring this data series.
In the race to taper asset purchases, the ECB may have let the Fed take the lead. The ECB policy decision went mostly as expected: ECB kept the main 7-day refinancing rate unchanged at 0.00% and maintained the Pandemic Bond Buying Program (PEPP) size at 1.85 trillion euro with the program lasting until at least March 2022 or when the crisis ends. Lagarde noted that it is too early to discuss PEPP exit, while that debate will probably heat up over the next few meetings. With EU inflation expected to remain below the ECB target in the coming year, policymakers might be one of the slower central banks in lifting rates. The euro danced all over the place following the US inflation data and ECB policy decision and presser, but has settled little changed on the day.
Crude prices pushed higher after the US inflation report and ECB policy decision. The inflation report was hotter-than-expected but the key takeaway was another month of surging used car prices cemented the view that this driving season will probably be stronger than expected. Commodity prices should remain elevated on Fed support as this inflation report still supports the idea that inflation will be transitory. Stimulus will remain strong in Europe as the ECB accelerates its pandemic purchases and is not ready to talk about exit its PEPP program.
WTI crude is once again above the $70 level and if bullish momentum remains, traders could turn overly bullish and target the mid-$70s and eventually the highs set in 2018.
Gold whipsawed after a very hot US CPI sent Treasury yields higher. Once investors digested the inflation report, they quickly concluded inflation will still likely be transitory and that it doesn’t change the longer-term narrative for Fed policy. The risks of persistent continue to dwindle despite hotter-than-expected inflation readings. Price hikes are sticky so financial markets need to be careful and not expect consumer giants to roll them back. For now, gold will probably see more inflows from the stimulus trade and broad rally with risky assets and less from inflation hedges.
Gold has recovered most of its losses following the hot, but still likely transitory US inflation report, improving jobless claims and a dovish ECB that showed its pandemic purchases will stay at higher level throughout the third quarter. Gold bulls will likely have to wait till the June 16th FOMC decision to get further confirmation that they are playing the waiting game over substantial progress in the labor market and inflation data, and will not show any hints over tapering.
Gold should consolidate around the $1,900 level leading up to next week’s FOMC decision.
Bitcoin got an added boost from the broad rally on Wall Street as investors looked beyond rising inflation readings . Bitcoin headlines have turned bullish over the past couple days as crypto traders embrace El Salvador’s decision to make Bitcoin legal tender and as India pivots away from banning Bitcoin. The $30,000 to $40,000 remains intact for Bitcoin and is welcomed news for longer-term bulls. An extended consolidation is healthier for Bitcoin right now as much of Wall Street remains on edge until clarity emerges over the US regulation and how quickly progress is being made over ESG concerns.
Related: The Inflation Storm is Coming