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Weekly Market Commentary | US Consumer Price Index data release to be closely watched by markets

Please see below for Brooks MacDonald’s latest market update, received by us yesterday evening 07/06/2021:

  • Last Friday’s US jobs report missed expectations but the figures were welcomed by markets
  • With the EU vaccination programme progressing well, this week’s European Central Bank (ECB) meeting will be closely watched
  • US Consumer Price Index (CPI) on Thursday is arguably the most important data release so far in 2021

Last Friday’s US jobs report missed expectations but the figures were welcomed by markets

Equities ended the week strongly, despite the US jobs report coming in behind expectations. Growth equities were a particular beneficiary after the non-farm payroll report was released on Friday.

The May US employment report missed expectations but only mildly compared to the miss in April’s figures. May saw c.559,000 new jobs created on a headline basis and c.496,000 of those within the private sector1. Describing the gain, Federal Reserve Bank of Cleveland President Mester said that while the figures were positive, they fell short of substantial further progress which is the bar set by the Federal Reserve to consider tapering2. Beneath the numbers, the labour force participation rate fell, which may suggest that there is some hesitancy to return to workplaces or that stimulus measures have reduced the need to return to the workforce short term. The jobs report saw US 10-year Treasury yields fall as market participants priced in a slightly slower than expected recovery, which is showing fewer signs of acute labour shortages. It is those labour shortages that are particularly relevant given their role in driving supply side inflation as employers compete for workers.

With the EU vaccination programme progressing well, this week’s European Central Bank (ECB) meeting will be closely watched

This week’s main event is undoubtedly the US CPI number on Thursday, and this arguably represents the most important data release so far in 2021. Consensus estimates point to a 0.4% month-on-month increase in both the headline and core inflation rate, which would mean that core US inflation would move to 3.4% year-on-year3. This would be the highest level of core inflation since 19934. Of course, the massive reduction in economic activity last year skews these figures and this release, alongside June’s, sees a substantial uptick in inflation due to this ‘base effect’ alone. Thursday also sees the ECB’s meeting where the central bank, under less inflation pressure than the US, is likely to continue with its faster pace of asset purchases, for the short term at least. As the EU vaccination drive continues to gain momentum, an exit of this pandemic quantitative easing programme may be on the cards but probably not until the last quarter of this year.

US Consumer Price Index (CPI) on Thursday is arguably the most important data release so far in 2021

The US CPI number will be very closely watched by markets, not only for the core inflation figure but also what is driving the subcomponents. Last month, used cars were an outsized contributor to the figures but investors will be looking for signs of a broader increase in price pressures.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

08/06/2021