Read the 10 stories to remember from the week which ended May, 14th 2021.
Story #1: Inflation worries drag stocks down from record highs.
Stocks slipped back from record highs as investors confronted stark signs of higher inflation, but a late rally moderated the week’s declines. Tesla was down for the 4th straight week and had its worst week since March 2020, closing below its 200-day moving average. Consumer Discretionary stocks were the worst on the week, along with Technology. At its low point on Wednesday, the technology-heavy Nasdaq Composite index was down roughly 8.5% from its intraday April 29 peak, still above the widely accepted 10% threshold for a correction. T. Rowe Price traders observed that market volumes also remained relatively muted given the volatility. Consumer Staples and Financials were the best performing sectors, eking out very modest gains.
Story #2: Core inflation sees biggest monthly jump since 1982.
The week brought some macro data surprises. On Wednesday, the S&P 500 Index had its worst day since February 25 after the Labor Department reported that core (excluding food and energy) consumer prices jumped by 0.9% in April, the most in nearly four decades and roughly triple consensus estimates. The headline consumer price index (CPI) rose 4.2% over the 12 months ended in April, exceeding forecasts for a 3.6% increase. Producer prices, reported Thursday, rose 0.6%, roughly double expectations. Stocks recovered some momentum on Thursday helped by a bigger-than-anticipated drop in weekly jobless claims to another pandemic-era low of 473,000. April retail sales, reported Friday, were flat for the month, but that followed a March sales surge that was revised higher, to 10.7%. The economy’s continued reopening was reflected in healthy gains in spending at bars and restaurants. President Biden said that fully vaccinated people do not need to wear face masks or socially distance in most circumstances indoors.
Story #3: Fed officials stress inflation is likely to prove temporary.
The market’s partial recovery late in the week may have also reflected a growing consensus that higher inflation data stems from temporary dislocations from the pandemic, particularly on the inflation front. Rental car prices jumped 10% in April, a function partly of agencies selling off their fleets to stay afloat in 2020. Airline fares also jumped 10% and hotel prices rose nearly 9%, as many Americans resumed travel. Worries over the hacker-induced shutdown of a major gasoline pipeline operated by Colonial Pipeline, the primary supplier to much of the Southeast, also faded after operations were partially restored on Wednesday evening. Federal Reserve officials also made repeated assurances that the inflation data would not prompt any sudden shift in monetary policy.
Story #4: Bond yields increase but stay below recent peaks.
US Treasury yields were all higher on the week, mainly due to the reaction to the hotter than expected CPI print on Wednesday. The long end underperformed with 30-year yield up +7.5bps. The 10Y Yield ended the week back above 1.60% but erased most of the CPI spike, staying well below its late-March highs as the bond market seemed to take its cue from the Fed. In Europe, core eurozone bond yields rose in tandem with U.S. Treasury yields. Fears of the European Central Bank (ECB) slowing bond purchases also pushed yields higher. UK gilt yields also tracked U.S. Treasury yields amid global weakness in government bonds.
Story #5: The rise of inter-markets correlation
We note that both stocks and bonds were lower on the week for the worst combined performance since February. After more than a decade mostly in negative territory, the 60-day correlation between U.S. Treasuries and the S&P 500 Index has reached the highest since 1999, according to data compiled by Bloomberg. Risk Parity crashed this week (as bonds and stocks fell together) - this was the worst week for Risk Parity strategies since March 2020.
Story #6: European equities fell amid signs of accelerating inflation, stoking fears that interest rates could increase.
The pan-European STOXX Europe 600 Index ended the week 0.54% lower. Germany’s Xetra DAX and France’s CAC 40 were little changed. The UK’s FTSE 100 pulled back 1.21%, in part because the British pound appreciated relative to the U.S. dollar after local election victories for the ruling Conservative Party. The European Commission (EC) called on European Union (EU) countries to halt nonessential travel from India to limit the spread of a coronavirus variant that the World Health Organization classified as being “of concern.” The UK government said further relaxation of the lockdown would go ahead on May 17, even though there are worries about the Indian variant. News reports said that officials are contemplating stepped-up testing for the coronavirus and bringing forward a second dose of the vaccine in virus hotspots.
Story #7: EC raises growth forecasts while UK economy expands in March
The minutes of the ECB’s most recent policy meeting suggested that the governing council was satisfied with market developments going into the April meeting. There was broad agreement that euro area financing conditions had remained broadly stable since the March meeting. The EC revised its economic growth forecasts to 4.3% for 2021 and to 4.4% for 2022—an increase from previous estimates of 3.8% in both years. Rising vaccination rates, the prospect of lockdowns easing across the region, and improving export demand prompted these upward revisions. UK gross domestic product in March grew a stronger-than-expected 2.1% sequentially, led by the reopening of schools, vaccine rollouts, and pickups in the retail and construction sectors. The expansion helped reduce the rate at which the economy contracted in the first quarter to 1.5%. Bank of England (BoE) Governor Andrew Bailey said the central bank is watching the inflation situation carefully but does not think that the factors driving up consumer prices will last.
Story #8: SoftBank Group posts record profit for a Japanese company
Japan’s stock markets registered sizable losses for the week amid a bout of volatility following an unexpectedly sharp rise in the U.S. consumer price index. Accelerating coronavirus infection rates and the announcement that a state of emergency will be declared in three more prefectures also dampened risk sentiment. On the corporate front, telecommunications and internet conglomerate SoftBank Group posted the highest-ever annual net profit for a Japanese company. Its Vision Fund has been boosted by a vibrant U.S. market for initial public offerings (IPOs), particularly the listing of South Korean e-commerce giant Coupang. Shares tumbled following the announcement, however, after the conglomerate did not extend its buyback program, removing support for the stock as concern over frothy valuations appeared to outweigh the record earnings. CEO Masayoshi Son said that he wants to more than double its Vision Fund portfolio to 500 companies, building a pipeline that generates listings of dozens of companies every year.
Story #9: Commodities
The dollar ended the week very modestly higher after running the stops above last Friday's payroll print peak. Commodities had their worst week since October. Crude managed modest gains on the week on the back of the Pipeline hacking. Silver saw a small loss while Gold closed near the highs of the week and managed to break key resistance on a weekly basis. Industrial metals (copper, iron ore, steel, etc.) were all hit as China said they want to curb the rapid rise of commodity prices. Lumber was hammered as well.
Story #10: Mixed cryptocurrencies markets
Elon Musk’s announcement that electric vehicle maker would no longer accept Bitcoin as payment because of its carbon footprint sparked a sell-off in the cryptocurrency. The Crypto market was very mixed with bitcoin battered (following Musk's tweet) as Ether surged, closing the week above $4000 as the massive run in ETH relative to BTC continues. Proof-of-stake currencies such as Cardano trumped proof-of-work currencies (such as Bitcoin).
Source: T Rowe Price, Investopedia, www.zerohedge.com