11.06.2021 - Global equities ran in place for a second consecutive week as investors continued to ponder the potential for inflation. The yield on the benchmark US 10-year Treasury note declined to its lowest level in a month, falling to 1.47%, with investors surmising the Fed was not close to tapering economic stimulus. The price of a barrel of West Texas Intermediate crude oil continued to rise at $71.05. Volatility, as measured by the Cboe Volatility Index (VIX), fell slightly to 15.6.
MACRO NEWS
Yellen constructive on US inflation US Treasury Secretary Janet Yellen said that US President Joe Biden’s $4 trillion spending proposal would be positive for the country, even if it leads to higher interest rates. The former US Federal Reserve chair said the president’s plans would total about $400 billion each year, a level of spending she maintained was not enough to create an inflation overrun. Yellen opined that a slightly higher interest rate environment would actually be a plus from a societal and Fed point of view since the Fed has been combatting low inflation and interest rates for a decade. She added that if the spending helps alleviate these problems then it is a good thing.
G-7 nations agree on global tax reform The finance ministers of the most advanced economies, known as the Group of Seven, have backed a US proposal that calls for corporations around the world to pay at least a 15% tax on earnings. The historic deal would represent a significant development in global taxation. An agreement among this group, which includes Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, would provide momentum for planned upcoming talks in Paris in which 135 countries are expected to participate. Finance ministers from the Group of 20 are also expected to meet in Venice in July.
Inflation viewed from a divergent lens In a forecast that is contrary to the consensus of policymakers and Wall Street, Deutsche Bank issued a dire warning on inflation. The bank said that focusing on stimulus while dismissing inflation fears will prove to be a mistake, if not in the near term then in 2023 and beyond. The firm believes that the Fed’s intention not to tighten policy until inflation shows a sustained rise will have grim impacts. The bank feels that aggressive stimulus and fundamental economic changes will lead to inflation that the Fed is not prepared to address. Deutsche Bank said the coming inflation could resemble the experience of the 1970s, a decade during which inflation averaged nearly 7% and was well into double digits at various times. Soaring food and energy prices along with the end of price controls helped push that era’s soaring inflation. However, most on Wall Street agree with the Fed’s view that current inflation pressures are transitory, and they doubt there will be any policy changes soon.
Connecting the US jobs dots There were a record 9.3 million US job openings in April (8.2 million expected), which was well above the previous record of 8.3 million openings in March, according to the US Department of Labor's Job Openings and Labor Turnover Survey. The big jump in job openings came during a month when hiring disappointed, with payrolls increasing by just 278,000 jobs instead of the 1 million expected. Quits, which are viewed as a gauge of worker confidence that they can find other employment, rose 11% to almost 4 million. Jobless claims for the week came in at 376,000 (versus an estimate of 370,000), marking the lowest number of the pandemic era and continuing a six-consecutive-week decline.
Prospective inflation hedges in context In theory, an investment that hedges against inflation generally rises along with the rapid growth in consumer prices. Gold, which is often billed as an effective hedge against inflation, has not always lived up to the hype. It has produced a negative return for US investors during some of the highest recent inflationary periods. According to Morningstar data, gold investors lost 10% on average from 1980 to 1984, when the annual inflation rate was about 6.5%. Similarly, gold yielded a negative 7.6% return from 1988 to 1991, a period when inflation was about 4.6%. However, investors won big from 1973 to 1979, when the annual inflation rate averaged 8.8% and gold surged 35%. In comparison, REITs returned 11.5%, 20.4% and 9% from 1973 to 1979, 1980 to 1984 and 1988 to 1991, respectively, and commodities yielded 19.4%, 2.3% and 21% over the same periods.
QUICK HITS
El Salvador became the world’s first sovereign nation to adopt bitcoin as legal tender, alongside the US dollar. Prices will be shown in bitcoin, tax contributions can be paid with the digital currency and exchanges in bitcoin will not be subject to a capital gains tax.
Consumer prices, which represent a basket including food, energy, groceries, housing costs and sales across a spectrum of goods, rose 5% In May year-over-year (4.7% expected). This was the fastest pace of acceleration in nearly 13 years, the US Department of Labor reported as US inflation continued its recent rise.
China bought fewer American products in May than in the prior month, while exports to the US rose, according to customs data. As a result, China’s trade surplus with the US rose to $31.8 billion in May, up from $28.1 billion in April.
Investor morale in the eurozone rose for the fourth month in a row in June, reaching its highest level since February 2018, lifted by reopening restaurants and tourism resuming as coronavirus cases fell, according to a Sentix survey.
The US Food and Drug Administration approved the Alzheimer’s disease drug aducanumab, making it the first medication cleared by US regulators to slow cognitive decline in people living with Alzheimer’s and the first new medicine for the disease in nearly two decades.
China’s imports grew at their fastest pace in 10 years in May, fueled by surging demand for raw materials, although export growth slowed more than expected amid disruptions caused by COVID-19 cases at the country’s major southern ports.
The eurozone economy contracted by much less than expected in the first quarter of the year, revised data from the EU’s statistics office showed, with a buildup of inventories and investment offset by reduced consumer spending.
China’s producer price index rose 9% in May from a year ago as commodity prices surged, the country's National Bureau of Statistics disclosed. That marked the fastest increase in production costs since September 2008.
The US Senate passed a $250 billion bipartisan tech and manufacturing bill in an effort to keep the US competitive with China as one of the globe’s technological powerhouses.
The European Central Bank maintained an elevated flow of stimulus, fearing that any retreat now would accelerate an already worrisome rise in borrowing costs and choke off the fledgling recovery.
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