Overview: Stocks were positive across the globe last week, supported by falling coronavirus infections and optimism around progress with the proposed $1.9 trillion stimulus package. On the inflation front, core consumer prices (CPI) were unchanged. This reduces investor’s concerns that prices will rise significantly this year, as depressed demand from the pandemic continues to be a drag on the recovery. In the US, the S&P 500 Index was up 1.3%, with international stocks rising more than 2% for the week. In the bond markets, the 10-year Treasury yield rose to 1.20%, up from 0.91% at the start of the year. The 30-Year US Treasury yield finished the week at 2.01%, its highest level in a year.
Inflation update (comments from JP Morgan): Massive monetary and fiscal stimulus has investors wondering if we are in store for higher inflation ahead. January consumer price indices (CPI) showed muted inflation pressures, with core CPI (ex-food and energy) flat month-over-month, up 1.4% y/y. Headline CPI, however, rose 0.3% m/m, primarily driven by a 7.4% m/m rise in gasoline. Looking ahead, y/y headline CPI should accelerate further, reflecting higher current oil prices and inflationary pressures compared to plummeting oil and disinflation last spring. These effects may be largely transitory. However, service consumption, particularly in restaurants and travel, should pick up later this year once the pandemic is under control. After losing many businesses during the pandemic, a limited supply met with a surge in demand could produce higher services inflation, although that should normalize in 2022. We expect inflation to remain broadly in check over at least the next two years, prompting the Fed to hold rates steady. However, as growth and employment improve, it should lead to a steepening yield curve, which is a challenge to long duration bonds but a support to cyclical equities such as financials, industrials, materials and energy.
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management
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