MARKET WATCH: May 14, 2021

The losses were even steeper Wednesday as the Dow and S&P registered their deepest three-day declines in nearly seven months, after a sharp uptick in consumer prices heightened worries that interest rates could be set to climb faster than anticipated. According to U.S. Labor Department data released Wednesday, the consumer-price index jumped 4.2% in April from a year before, the most in any 12-month period since 2008. The news sent U.S. Treasury yields up by 7 basis points to 1.693%, the largest one-day yield gain since March. The materials sector was hit especially hard, as gold prices fell in response to a surging U.S. dollar.

Adding further fuel to U.S. inflation worries was news from the Treasury Department that the U.S. government ran a $1.9 trillion deficit from October through April, a 30% increase from a year earlier.

It was a bounce-back day for Wall Street Thursday, as U.S. stocks soared, chipping away at losses suffered during the week’s previous sessions. While big technology names saw gains, it remains to be seen how the inflation story plays out in the coming months. By Thursday’s close, the Dow added 434 points, the TSX rose 28, while the S&P and Nasdaq climbed 49 and 93, respectively.

N.A. Markets Lose Ground

For the four trading days covered in this report, the Dow lost 757 points to close at 34,021, the S&P 500 fell 120 points to settle at 4,112, while the technology-heavy Nasdaq tumbled 627 points to close at 13,125. In Canada, the TSX shed 337 points to end at 19,136. GLOBAL PORTFOLIO ADVISORY GROUP

Strategy

Secondary measures such as sticky price indices and multi-year inflation show more subdued environment than headline CPI

What we saw with the CPI reading on Wednesday were tailwinds from reopening the economy conspiring to drive inflation significantly higher than consensus expectations. However, it is important to note nearly 60% of the month-over-month increase in the headline was comprised of just five components: used cars, rental cars, lodging, airfares, and food away from home. Price changes in these categories tend to be volatile and add credence to our view that pressures are likely to be transient in nature.

Still, prices for commodities such as copper and lumber are booming, yet Fed officials have attributed these gains to bottlenecks as the economy reopens. The Atlanta Fed compiles an index of sticky prices, or those that do not move often, giving a signal on underlying inflation and excluding fast-changing commodities like gasoline and lumber. The sticky-price index rose a modest 2.4% over 12 months through April, far slower than flexible prices.

Another way of triangulating price pressure is to look beyond the typically one-year period and look at inflation on a long-term basis. Headline and core CPI were up a modest 2.1% and 2.2%, respectively, on a two-year basis, while the figures flip to 2.2% for headline and 2.1% for core over five-years.

Beyond this, we continue to highlight a number of structural factors have led to global disinflation over the past three decades. These include globalization, which has given access to cheaper supplies and labour from around the world, slowing growth and aging of the population which reduces demand over time. Those forces are likely to keep pushing against higher price pressures.

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MARKET WATCH: May 14, 2021

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