Weekly Market Update 06/07/2021

Inflation is a hot topic on Wall Street these days, with key economic reports showing notable increases in pricing pressures. Specifically, the price index for gross domestic purchases surged 3.9% in the first quarter, up from 1.7% in the preceding period. Further, the so-called core personal consumption and expenditures index, which backs out food and energy, rose 0.7% in April—the biggest monthly uptick since October 2001. Finally, the ongoing drop in weekly jobless filings (they hit another post-pandemic low in late May) figures to lead to additional upward pressure on labor costs and a possible resumption of the earlier rise in Treasury yields.

Notwithstanding these concerns, equities continue to give a good account of themselves. Wall Street, it seems, is paying more attention to the business recovery (see below) and to strong corporate earnings than to these nascent pricing pressures.

Moreover, the Federal Reserve believes these inflation fears are greatly exaggerated, with the lead bank opining that the higher prices being seen are largely transitory. As such, Fed officials are suggesting that no changes in monetary policy are imminent. That position also is underpinning the markets.

Pending reports should shed light on the question of inflation’s persistence. Particularly important will be issuances on average hourly wages (which are part of the Labor Department’s monthly release on the employment situation), consumer and producer prices, and retail sales (all of which are due out after we go to press). Likely proposals for growth in federal spending (e.g., the current U.S. budget) also may keep the focus on inflation.

Meanwhile, the business recovery remains on firm ground, with reports showing consistently high rates of consumer confidence and manufacturing activity (particularly new orders). In all, these and other key issuances suggest that second-quarter GDP growth may narrowly exceed the 6.4% tallied in the opening stanza.

Conclusion: The stock market’s resilience is clearly on display. That’s especially so since May’s selling proved rather fleeting. Still, equities hover around all-time record levels and some caution is warranted. Our sense, though, is that the fundamentals are sufficiently supportive to keep the bull market intact assuming inflation stays in check.

Source: Valueline.com