Weekly Stock Market Report: Fed’s Taper and Transitory Inflation

Stocks and bonds are mostly firmer in cautious trading. Action has been quieted too as German, Danish, Norwegian and Swiss stock markets shut for holidays, with Canada closed too. U.S. futures are posting gains of 0.37%, 0.46%, and 0.63% on the Dow, S&P 500, and NASDAQ, respectively. The FTSE is 0.5% higher, with the CAC 40 up 0.15%, but off their highs.

Asian markets are mostly in the green too with small gains. Bond yields are fractionally lower with the 10-year Treasury at 1.616%, the Bund at -0.132%, and the Gilt at 0.817%.

Alongside the bigger fundamental picture of monetary and fiscal accommodation, vaccines and viruses, the markets are also monitoring cryptocurrencies as China reiterated its commitment to curb mining and trading, while also intensifying efforts to cool raw material prices amid inflation concerns. The forced landing of a Ryanair plane in Minsk and arrest of a journalist adds another wrinkle to a difficult global  political environment. 

Key Drivers for the Week of May 24, 2021

TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.

  • Tapering and transitory remain a major focus of the markets
  • U.S. monitors confidence, growth and inflation amid growing tapering jitters
  • Fedspeak slated with Brainard, Mester, Bostic, George, Barkin, Evans, Quarles
  • Treasury to auction $183 bln in new 2-, 5-, 10-year maturities
  • CB meetings: RBNZ, Bank of Korea, Bank Indonesia expected on hold
  • Japan reports services PPI, Tokyo CPI, unemployment, and job offers ratio
  • Whit Monday holiday to slow action in Europe; Canada closed Monday
  • Eurozone ESI confidence; German Ifo sentiment, GfK confidence, GDP
  • UK public sector net borrowing, distributive trades survey due
  • Switzerland releases trade and KOF leading indicator

Uncertainty over the timing of central banks’ “T”apering discussions and growing doubts regarding the “T”ransitory nature of the inflation surge should drive market action this week after being responsible for the choppy moves last week.

In the U.S., another busy week of Fedspeak will be looked to for assurances that the ultra-accommodative policy setting will remain in place for some time even as prices surge. Inflation will remain front and center, with the price indicators in the consumer sentiment measures and personal consumption releases sure to draw attention, although the data slate will not add anything new to the recovery/reflation story.

A key issue that is not directly being talked about is the weakening of the US Dollar which is inflation. There is risk that if this trend continues, there could be severe market complication if it drops in the low 80 or below. The chart above shows the USD breaking through Support level 1 at 90. The decrease in value below 80 would definitely be a catalyst for a replacement of the USD as the world currency. Our speculation is that Chinese’s Yuan, which is currently undervalued, would take up much of the market share the USD would lose.

In the Eurozone, data releases should confirm the recovery story.

Monday is a holiday in many European countries. Asia will remain focused on rising Covid cases and deaths, but regional inflation figures and central bank meetings will be monitored.

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