Market and corporate attitudes towards inflation are mixed

Spark Global Limited reports:

While inflation has reached its highest level in more than a decade, the break-even rate, a measure of bond market inflation expectations, has barely changed in more than a month. Meanwhile, tech giants, seen as vulnerable to rising price pressures, have outperformed cyclical stocks that typically benefit from an inflationary environment.

Spark Global Limited reports:

Spark Global Limited reports:

The divergence highlights a trend that has continued since the lockdown began 16 months ago: that while economic hardship has weighed on businesses, markets have remained calm in the belief that the tough times will pass. So far, it has been a successful strategy for investors, who have found their footing in the worst recession in generations and seem ready to take risks again as the latest strains emerge. Seema Shah, chief Global strategist at Principal Global Investors, said:

“This is really a major misalignment that is becoming more apparent as the earnings season continues to unfold. Companies cannot afford to ignore inflationary pressures because it will affect their operations.”

Outside financial markets, the view on inflation is far from rosy. As of last week, about 87% of S&P 500 companies that have reported earnings mentioned inflation on their earnings calls in July, according to data. Concerns about the rising cost of living dragged Consumer confidence below all analysts’ expectations this month and the White House is also understood to be planning to change its language on inflation in the face of republican attacks.

The picture across asset markets is a far cry from the previous few months, when soaring vaccination rates and bail-out cheques sent inflation expectations to their highest level in nearly a decade. Technology stocks came under pressure, and the Nasdaq 100 briefly entered correction territory in March. Peter Boockvar, chief investment officer at Bleakley Advisory Group, said:

“Most people think inflation is transitory, or at least the Fed will be on high alert, and I think both are wrong. If CPI remains well above trend in the coming months, they will worry again. The market’s indifference to inflation is surprising and I expect alarm bells will be ringing soon.”

 

While inflation has been hotter and possibly more persistent than many economists had predicted, much of the increase has been driven by factors related to the economic restart. More than a third of the CPI increase in June came from used cars, according to the Labor Department.

While these factors have helped insulate investors from inflationary pressures for the time being, businesses and consumers are not as comfortable as before. Paints and coatings maker PPG Industries Inc. , Coca-Cola, industrial supplies distributor Fastenal Co. And have warned of rising costs.

Meanwhile, ordinary Americans are feeling the pinch. CPI jumped 5.4 per cent in June from a year earlier, while average hourly wages rose 3.6 per cent, meaning that wage growth has not kept pace with consumer spending.

 

Shah at Principal Global said the contrast between market and corporate attitudes to inflation may not last long and could eventually cause concern if the impact of supply pressures on input costs does not fade as soon as investors expect. Shah said.

“The struggles of companies now will ultimately weigh on the market.”

Inflation risks will prove more than temporary, prompting central banks to take pre-emptive action, the International Monetary Fund warned on Tuesday.

The inflation issue is currently dividing the investment community, with market players busy pondering whether the recent surge in consumer prices is sustainable. Data showed us consumer prices rose 5.4% in June, the fastest pace in nearly 13 years. UK inflation hit 2.5 per cent in June, the highest since August 2018 and above the Bank of England’s 2 per cent target.

In most cases, these price pressures are temporary, according to the IMF. “Inflation in most countries is expected to return to pre-pandemic levels in 2022,” the IMF said in its latest World Economic Outlook update, released on Tuesday.

However, the IMF warned that “uncertainty remains high”. The IMF noted that temporary pressures could become more persistent and that central banks might need to take pre-emptive action.

Rising prices increase the likelihood that central banks around the world will start to rein in their ultra-loose monetary policies, such as tapering market-friendly stimulus measures such as asset purchases.

Earlier this month, Mr Powell said the job market was “still some way off” from what the Fed would like to see before it reduces stimulus, and that inflation “is likely to remain elevated over the next few months before moderating.”

The IMF had pointed out earlier this month that if the US provided more fiscal support, it could add to inflationary pressures further and lead to an earlier than expected rate rise.

Meanwhile, US house prices again posted their biggest rise in more than 30 years.

Nationally, the S&P CoreLogic Case-Shiller home price index rose 16.6% in May from a year earlier, according to Tuesday’s announcement, up from April’s 14.8% rise and the 12th straight month of accelerating price gains.

The may increase was the biggest since the data began to be compiled in 1988 and eclipsed the previous record set in April. A lack of options on the market and low interest rates have spurred prices to rise. Craig Lazzara, global head of investment strategy at S&P Dow Jones Indices, said:

“I find myself running out of adjectives. We said earlier that the strength of the US housing market was partly driven by the response to the outbreak, as potential buyers were moving from urban apartments to suburban homes. The May data continue to be consistent with this hypothesis.”

A 20-city index of US home prices jumped 17 per cent from a year earlier, beating the median forecast of economists surveyed by Bloomberg and marking the biggest jump since August 2004.

Soaring prices have made it difficult for buyers to find affordable properties. Sales of new HOMES in the United States fell unexpectedly in June, according to a report this week. Phoenix led the way, with a 25.9 percent increase, followed by San Diego (24.7 percent) and Seattle (23.4 percent).

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