In spite of headline Consumer Price Index (CPI) rising 5.0% year over year, the fastest pace since 2008, the market reaction was fairly unimpressed. Interest rates continued to decline, and the S&P 500® Materials sector had its worst week relative to the overall index since January. We continue to believe rising prices during the accelerating expansion phase of the business cycle is coinciding with the economic reopening, skewing inflation data higher in the short term. Global CPI data is also at odds with sustained inflation concerns. The European Union CPI is at a moderate 2%, China CPI, at 1.3%, is not even back to pre-pandemic levels and Japan has been in an outright deflationary environment since October.
Domestic equities rallied for the third consecutive week, albeit at the lowest positive weekly return since last October for the S&P 1500®. Equity markets shrugged off the CPI report with smaller capitalization and growth stocks leading markets higher.
A backdrop of favorable financial conditions and inflation concerns showing signs of exhaustion led to an especially positive week for the Russell 2000® Growth Index. Not only did it stay above its 50-day moving average the entire week, but it outperformed its Value counterpart by the most since December.
MSCI World ex USA Index performance was mixed across countries and sectors, with recent underperformance from cyclical industries lagging. European Central Bank (ECB) President Christine Lagarde affirmed an even greater pace of asset purchases in the latter half of the year. To us, this suggests an extended negative interest rate environment in Europe, and as such the German 10-year bund fell to -27 basis points, the lowest level in two months.
The MSCI Emerging Market Index posted its fourth consecutive week of positive returns, the longest streak since January. Markets were led higher by Information Technology stocks as COVID-19 case levels in countries such as South Korea and Taiwan continue to decline from about four weeks ago.
Conferences for the week include the Morgan Stanley Financials, Payments and CRE Conference where a presentation from PNC is expected, as well as the Goldman Sachs Digital Economy Conference and the Evercore ISI Consumer & Retail Summit.
Fixed Income Markets
Despite a CPI reading above consensus estimates, interest rates continue to reflect a transitory inflation backdrop, with the 10-year Treasury yield retreating to a three-month low last week.
Considered the first “bitcoin bond,” MicroStrategy Incorporated issued a $500 million below-investment grade bond with the explicit intent of using the proceeds to add to its 92,000 bitcoin holdings. Interestingly, the bond was already added to high yield bond exchange-traded funds, including those still held by the Federal Reserve since last spring.
Chart of the Week
Acknowledging a backdrop in which economic indicators are accelerating at high growth rates, we continue to believe the accelerating expansion phase of this cycle may be short lived. That is in part highlighted by financial conditions reaching among their most favorable levels on record.
Under “normal” circumstances, favorable financial conditions would suggest corporate activity is ripe for cyclical expansions – whether through capital expenditures or aggressive hiring plans. Instead, we see a backdrop driven by significant fiscal stimulus and a commitment to easy monetary policy.