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A decision on whether to maintain a higher pace of emergency asset purchases is investors' focal point as European Central Bank policy makers are due to meet today. Furthermore the highly anticipated US inflation figure for May will be released. Inflation has been a major talking point over the past couple of months, as many believe it to be the canary in the coal mine as to if/when the Federal Reserve (Fed) will change tack with regards to its loose monetary policy.
Continuing on inflation, April’s CPI release saw a rise to +4.2% year-on-year, which marked the fastest inflation we’ve seen in the US this side of the financial crisis. The Fed’s argument is remains that this heightened level of inflation is to be expected and is transitory, meaning that they will wait to see a sustained trend prior to taking any action.
In my opinion the Fed’s reasoning is highly justified given the one-off factors such as those associated with the economic reopening and base effects. Furthermore, digging deeper into the categories that formed the strength in core CPI last month, one will notice that these largely form part of the epicentre of the Covid pandemic, where there were likely severe supply/demand imbalances related to reopening or stimulus-boosted demand.
The market appears to have accepted the Fed’s stance, and markets generally been hovering near record highs throughout the month of May and June. This has also been supported by the fact that the last couple of jobs reports were weaker than the consensus expectations, even as data on job openings point to a record number of available positions, and surveys have further suggested firms are struggling with labour shortages.
Back to the ECB meeting, the institution is expected to maintain the faster pace of PEPP purchases for the time being, in line with the dovish tilt in the Governing Council’s latest commentary. Of notable relevance will be ECB’s forecasts for growth and inflation which should set the tone for risk assets for the next few weeks.
European stocks have been outperforming their US counterparts in recent weeks, with the former pushing past their record highs, while the latter has remained hovering in range. On the other hand European yields moved lower in line with the moves seen in US Treasuries.
In terms of the latest on the pandemic, there was further concern in the UK about the Delta variant that originated in India, as the number of reported cases yesterday grew to the highest since February 27. The number of cases has been sequentially increasing over the last week, and is up by nearly two-thirds compared to the previous one.
Uncertainty is now rife over the continued easing of restrictions on June 21, with commentators speculating that the UK government will err on the cautious side and delay the re-opening by potentially by a number of weeks. In more positive news however, in a UK study conducted over the last 3 weeks it was estimated that 80% of English adults would have tested positive for Covid-19 antibodies which augurs well for the avoidance of severe disease despite rising case numbers.
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