Overview: Global stocks were mixed last week, with emerging markets (MSCI EM) posting a positive return of 1.7% for the week, while international developed stocks (MSCI EAFE) traded down 0.30%. In the U.S., the S&P 500 index reached a new all-time high of 4700 before ending the week down 0.30%. Markets across the globe are dealing with higher-than-expected inflation, as well as Federal Reserve asset purchase tapering, which will begin this month. In the bond markets, yields rose sharply over the past week as investor concerns for persistent inflation were reinforced by an above-expected consumer prices (CPI) report. The U.S. CPI rose by 0.9% in October, and 6.2% year-over-year, the highest inflation reading in 31 years. The 2-year Treasury increased in yield from 0.40% to 0.52% for the week, while the 10-Year Treasury yield rose from 1.45% to 1.58% over the week. The rise was driven primarily by rising food, energy, and vehicle prices as supply bottlenecks continue to affect the recovery. Inflation is an issue across the globe as well. In China, October CPI rose 1.5% year-over-year. Producer prices (PPI) in China were reported at an increase of 13.5% over the past year, a 26-year high.
Inflation update: (from JP Morgan) U.S. inflation, as measured by CPI, rose at its fastest pace since October 1990. Headline CPI surged 6.2% y/y (+0.9% m/m), led by increases in energy (+4.8% m/m), used and new vehicles (+2.5% and +1.4% m/m), food (+0.9% m/m) and shelter (+0.5% m/m). Yet another hot CPI print is causing many to consider just how transitory inflation really is. Though there is no official definition of the difference between transitory and sticky inflation, components related to the reopening story are likely to be transitory, while inflation due to a broad increase in wages or prices is likely to be sticky. For example, higher auto prices are clearly transitory. The vehicle computer chip shortage is currently limiting inventories and thus, driving up vehicle costs; however, as supply improves, prices should moderate. On the other hand, higher lawyer fees are a hypothetical example of something sticky. There is no particular shortage of lawyers and if prices are rising here, it is more a reflection of general excess demand or too much money chasing too few goods and services. Even as the pandemic recedes, wage growth will continue to put upward pressure on inflation for some time. The reopening/transitory components of inflation were the main culprits behind price pressure earlier in the year; however, the non-reopening/stickier components are beginning to gain momentum. Looking ahead, as the Fed begins tapering, the transitory argument is becoming harder to make, increasing the likelihood that the Fed may increase short-term interest rates faster than its recent public statements may have suggested.
Weekly Returns and Data
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s
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