International Communique No. 292 – 18th May 2021


Inflation figures from the US called the tune in financial markets last week, after fears were stoked by booming commodity prices and supply bottlenecks for some types of goods. The price data clocked in well above expectations, springing a nasty surprise on equity investors.

This consumer price index jumped by 4.2% year-on-year in April. The less volatile core inflation was up by 3%. In contrast, stagnant US retail sales in April and a low capacity utilisation figure (74.9%) – showing that the economy is far from overheating – probably supported share prices towards the end of the week.

The inflation surge was largely powered by the base effect, in comparison with the depressed April 2020 level. Prices of air tickets and hotel stays have soared. However, rents and medical services, which are slower moving and more reflective of inflation expectations, have risen more moderately, which is reassuring. Inflation quickened by 2% both in Germany and in the Eurozone, in line with expectations.

The question is whether this price upswing will last or not. The whole dilemma is keeping investors on their toes. Yet there is no clear answer. Some of the effects are likely to be temporary, linked to shortages; others will be longer lasting, as the huge US fiscal stimulus will boost aggregate demand.

Central banks, including both the European Central Bank and the Fed, believe that the trend will not persist for more than a few months. Their main argument is that their economies are far from full employment. Additionally, some central banks are adamant about keeping monetary policy nice and loose. In the US, criticism of the Fed for once again ‘lagging behind the yield curve’ has been rife. Will this soon pave the way for ‘tapering’ (which means gradually reducing asset purchases followed by higher policy rates)?

The tech sector saw the fiercest correction last week. Growth stocks, which are hovering on high multiples, faced particularly harsh pressure due to rising long-term yields. However, tech majors with steady profits tended to be more resilient. In the long term, the sector will also be supported by the fiscal splurges.

Large buyback plans were announced by blue chips, which will support stock prices. Excess cash has resulted in a total in Europe that is 5% above pre-pandemic levels. In the US, the total is estimated close to USD 500bn – the loftiest level in 20 years and 35% higher than in 2020.

If you have any questions please contact the office on (03) 9670 6070.