International Communique No. 296 – 15th June 2021


Globally, growth is accelerating in most advanced economies. Vaccination drives have permitted some relaxation in the restrictions aimed at containing the virus, which in turn is boosting consumer spending. Meanwhile, industrial production is increasing, although the trend is patchy on a country-by-country basis. However, it’s important to understand that the current data take the previous year as their base, at a time when figures were plunging as a result of the pandemic.

Cross-border trade has been stricken by significant supply issues for several months. Shortages and bottlenecks are driving up prices, raising fears among some investors of imminent tightening in monetary policies. In this setting, the bond market is doing the opposite of what it is ought to do. Rather, the downturn in long-term yields indicates that US Fed chair Jerome Powell has succeeded in convincing most people that the current inflation spike will be temporary. Correspondingly, the yield on 10-year Treasury bonds has slipped to 1.45% – a level not seen since March. However, the lofty valuations enjoyed by equities are increasing the risk of a correction amid higher short-term volatility. Meanwhile, the S&P 500 last week set a new record and the Nasdaq finished above 14000 points. Tech stocks were picked up while industrials were dumped. Healthcare and utilities helped led global stockmarkets higher while financials, hurt by the ebbing yields, staged a retreat.

The US consumer price index jumped by 5% year-on-year in May. Such a dramatic increase, not seen for nearly 13 years, is indicative of a strong recovery in the American economy. Inflation is riding higher on the back of dearer used cars and car rentals, demand for which is surging as many Americans take advantage of home-working arrangements to decamp from inner cities. Another reason is that the production of new cars has been severely hampered by the shortage of semiconductors.

At its meeting on Wednesday, the Fed (which is still buying USD 130 billion of assets per month) will probably leave its ultra-loose monetary policy unchanged. Unsurprisingly, the ECB has stuck to its guns, revising GDP growth for this year from 4% to 4.6% and inflation to 1.9%. According to Christine Lagarde, the latest data point to a rebound in services and continued momentum in manufacturing, suggesting faster GDP growth in the second quarter. The ECB will continue its asset purchase programme at a higher pace than at the beginning of the year. In any case, when tapering is eventually decided upon, it will be a very gradual.

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