The S&P 500 Rises to New Highs with Highest Reported Inflation in Years

Inflation ruled the headlines in the trading week ending on Friday, 11 June 2021. But perhaps the most surprising outcome of the higher than expected inflation data that came out on Thursday, 10 June 2021 was its the effect of the report on U.S. stock prices. They rose to close at new record highs after the Bureau of Labor Statistics’ Consumer Price Index report for May 2021 became public.

From our perspective, the S&P 500 (Index: SPX) appears to be behaving consistently with investors focusing on the current quarter of 2021-Q2. That assessment assumes the amplification factor of the dividend futures-based model is -5, which may no longer be true. We are closely watching for indications that value has changed in response to the inflation report, where we don’t yet have enough information to confirm a change. We may be revisiting this initial assessment as early as next week, because we’re also on the cusp of when the focus of investors will be forced to shift to another point of time in the future, if it hasn’t already.

The May 2021 inflation report is significant enough that we’ve gathered a range of analysis from investing professionals related to the main question it raises: Is it a short-term “transitory” affair or will it have long-lasting legs? Here’s a short roundup of analysis on the “transitory” side of the argument:

• Goldman CFO says inflation likely transitory but a sharp rise would have ‘negative consequences’
• Markets Have Bought The Fed’s ‘Transitory’ Narrative Hook, Line And Sinker
• #MacroView: Rates, The Dollar & The 2021 Outlook

Here are several arguments favoring the interpretation higher inflation will be with us for an undetermined time to come:

• Deutsche Bank warns of global ‘time bomb’ coming due to rising inflation
• BofA Just Threw Up All Over The Fed’s “Transitory” Argument: Here’s Why
• Today’s Consumer Inflation Cycle Comes With Yesteryear Denial, Problems & Consequences

And one last take, from RaboBank, which considers both possibilities:

• Answering The “$64 Trillion Question”: A New Theory Of Inflation

And you thought it was going to be a dull summer! Let’s close by rounding up the market-moving headlines of which we took note during the week that was….

Monday, 7 June 2021

• Signs and portents for the U.S. economy:

• Yellen says higher interest rates would be ‘plus’ for U.S., Fed- Bloomberg News
• From lapsing job benefits to full stadiums, June could be U.S. recovery’s pivot
• Oil dips on profit-taking after logging 2-year high on OPEC+ curbs
• U.S. consumers sour on housing market’s buying conditions

Fed minions drive interest rates to 0%:

• Fed’s reverse repo volume hits all-time high

Bigger inflation developing all over:

• China’s imports grow at fastest pace in decade as materials prices surge
• Russian May inflation accelerates to 6.0%, above forecast
• Only quick shift to ‘net zero’ emissions will boost GDP: report

Wall Street mixed as buyers step to sidelines

Tuesday, 8 June 2021

• Signs and portents for the U.S. economy:

• Oil rises as Iranian supply not seen returning soon
• U.S. crude oil exports in April reached 3.24 million bpd – U.S. Census Bureau
• U.S. job openings, quits hit record highs in April

Bigger trouble developing in Eurozone:

• Supply bottlenecks throttle German industrial output in April
• Euro zone economic dip milder than expected in first quarter

S&P 500 closes little changed as “meme stocks” extend rally

Wednesday, 9 June 2021

• Signs and portents for the U.S. economy:

• U.S. wholesale inventories rise solidly; supply constraints loom
• Campbell Soup lowers annual profit forecast as costs rise
• Oil steadies amid weak summer kickoff for U.S. fuel demand
• Senators discuss U.S. infrastructure deal that avoids tax hikes

Fed minions drive interest rates to 0%:

• U.S. Fed’s reverse repo volume soars to half a trillion dollars

Bigger inflation developing all over:

• China’s highest producer inflation in over 12 years highlights global price pressures
• Brazil inflation in May hits multi-year high, putting upward pressure on interest rates

Wall Street reverses, closing lower ahead of inflation report

Thursday, 10 June 2021

• Signs and portents for the U.S. economy:

• U.S. wholesale inventories rise solidly; supply constraints loom
• P&G says commodity, freight costs to bite this fiscal year
• Oil steadies amid weak summer kickoff for U.S. fuel demand
• Senators discuss U.S. infrastructure deal that avoids tax hikes

Bigger inflation developing all over:

• China’s highest producer inflation in over 12 years highlights global price pressures
• Brazil inflation in May hits multi-year high, putting upward pressure on interest rates

Wall Street reverses, closing lower ahead of inflation report

Friday, 11 June 2021

• Signs and portents for the U.S. economy:

• Oil hits multi-year highs in third weekly gain on demand recovery

• Oil rally has more room to run, Brent expected to hit $80/bbl – Goldman

Fed minions expected to announce slowing bond buys befoere end of 2021-Q3, starting with cuts to mortgage bond buys first:

• Fed to announce QE taper in August or September on rising inflation concerns: Reuters poll
• Fed may opt for faster phase-out of housing-backed bond purchases

Recovery signs in Eurozone:

• German economy set for post-pandemic bounce in growth and prices, Bundesbank says
• Italian economy to grow around 5% this year, says central bank

Bigger inflation developing all over:

• Russia raises key rate to 5.5%, flags more hikes to curb inflation
• U.S. inflation will accelerate if recovery stays on track: Kemp

BOJ minions coming to grips with never-ending stimulus:

• BOJ may extend pandemic-aid schemes to support fragile recovery

Wall Street ekes out gains to close languid week

Normally, we’d point to Barry Ritholtz’ weekly succinct summation of his list of positives and negatives for the economy and markets at this point. Alas, he presented none of either this week!