Inflation Fears (?) – Monday Morning Market Memo – June 14, 2021

Inflation Fears (?) – Monday Morning Market Memo – June 14, 2021

Good morning,

The major stock market averages were, on balance, relatively quiet last week.  The Dow Jones Industrial Average fell .8% to 34,479.  The NASDAQ Composite rallied 1.8% to 14,069, extending its weekly winning streak to four.  The Standard & Poor’s 500 Index registered its third consecutive positive week, rising .4% to a new record high close of 4,247.

The stock market was able to shrug off an inflation report that came in hotter-than-expected.  The Bureau of Labor Statistics reported the Consumer Price Index (which measures the price of a basket of consumer goods and services) rose 5% in May, the largest increase since 2008.  This was the second “hot” report in row, as the April reading showing a jump of 4.2%, was also above market expectations.  While it is a bit surprising the stock market took the inflation number in stride, it is definitely surprising the bond market showed no fear of the inflation.

The 10-year Treasury yield fell to about 1.45%, near a 3-month low and down notably from its recent high around 1.75  Remember bond prices and interest rates have an inverse relationship, and bond prices are not normally bid up during times of inflation.  Perhaps bond prices rose because news reports indicate the infrastructure spending out of Washington may come in with a lower price tag, or possibly the market is pricing in less growth (meaning less inflation) during the second half of the year.  Also, the yield on the 10-year was below 1% to start the year, so it did already make a large percentage move higher.

Whatever the case, based on the positive trading action last week, both bond and stock investors alike, seem to be in agreement with Federal Reserve commentary that this recent spike in inflation will be “transitory”.  We’ll get more on this theme in the week ahead when the Federal Open Market Committee announces its policy decision Wednesday afternoon.  It is near certain the Federal Reserve will not be raising interest rates.  For example, the CME FedWatch Tool is currently showing a 95% probability the Fed will keep rates unchanged, holding the current target rate of 0 to .25 percent.

However, the market will be looking closely for any hints/guidance as to when the Fed may scale back its bond purchases (tapering).  Many believe we are close to (or at) the point when the Fed may “talk about talking about” tapering, which could be a pivot point for both bonds and stocks.  The Fed certainly remembers the “taper tantrum” in 2013 when U.S Treasury yields spiked after the Fed announced future tapering of that Quantitative Easing program.  Policymakers will likely try to ease into the reduction of easy money policy as seamlessly and smoothly as possible.  Taking the punch bowl away at the party, or refilling it more slowly, can be tricky – stay tuned!

As always, don’t hesitate to call us with any questions or if you would like to set up a meeting.

All the best – Southport Station Financial Management, LLC