Stock markets around the world have made little upward progress this week despite the ongoing economic recovery from the Covid-19 pandemic. But the main story over the past few days has been investors’ willingness to shrug off the news that inflation is rising faster than expected in Europe, the United States and Asia.
Over recent months, the threat of inflation has been seen as the main obstacle to stock market growth. Higher prices as the post-pandemic economic recovery takes hold are thought likely to lead to a quicker withdrawal of central bank stimulus measures – known as quantitative easing – and higher interest rates, both of which typically depress share prices.
But on Thursday, when the US reported consumer price index (CPI) inflation running at 5% – well above most analysts’ forecasts and the highest rate since the financial crisis – markets were largely unmoved. This is in no small part down to the Federal Reserve and other major central banks’ success in managing expectations around inflation and tighter monetary policy.
The Fed has been at pains to point out that rising inflation is part and parcel of the recovery, particularly when the rapid slump in prices in the early stages of the pandemic last spring is taken into account. Importantly, central banks see a spike in inflation as inevitable but very probably short-lived – which means that there will be no immediate need to hike interest rates or turn off the stimulus taps. For the time being at least, investors seem content to accept this view.
Other economic indicators were mixed this week: on Monday, China reported a slowdown in its export performance following Covid-19 outbreaks at two major ports, while the global shortage in materials and components – most notably, semiconductors – continues to weigh on industrial output. In Germany, industrial orders fell in April, surprising analysts who had forecast modest growth.
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 0.8% down for the week so far, with the S&P 500 edging 0.2% ahead. America’s tech giants appear relaxed about the potential for higher tax bills after a new global tax deal was agreed by G7 ministers. Meanwhile, employment figures in the US continued their recent upward trajectory.
The UK & Europe
In the UK, the FTSE 100 ended Thursday 0.3% ahead for the week, bolstered to some extent by declines in sterling – a falling pound means that the revenues earned overseas by the FTSE’s many multinationals are more valuable. A new row between Britain and the European Union over Northern Ireland’s trade status has caused much of the currency’s weakness.
The number of UK workers using the government’s furlough scheme has fallen to a new low this week, while there are also signs that consumer spending is picking up. Meanwhile there were gains in travel stocks as the EU and US announced plans to ease international travel this summer.
In Frankfurt, the DAX index ended Thursday’s session down 0.8% for the week, while France’s CAC 40 gained 0.5%. The ongoing semiconductor shortage has hit German motor manufacturers, with both Volkswagen and BMW recording falls this week.
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 10/6/2021.