Inflation Nation?

Weekly Market Update | November 15, 2021

Highlights

Global equities (as measured by the MSCI AC World index) were largely unchanged last week, but most regions finished the week slightly lower. In the U.S., the S&P 500 slipped 0.3% while the NASDAQ dipped 0.7% as inflation fears pushed up interest rates. Non-U.S. markets were generally weak as well with European stocks falling 0.3% and Japanese stocks losing 0.4%. Emerging Market stocks outperformed – rising 1.7%. The 10-year U.S. Treasury yield rose from 1.45% to 1.56% as U.S. inflation came in hot.

The U.S. consumer price index (CPI) jumped to 6.2% year-on-year in October. This was higher than the consensus expectation of 6.0%. Price gains have been widespread with energy, used car and truck, and meat, poultry and egg costs rising. Even when energy, used car and truck, shelter, and food prices are stripped out, inflation is currently running at a rate of 4.0%. However, the jump in energy prices is unlikely to repeat, supply bottlenecks should ease, and the massive fiscal stimulus issued in response to COVID is unlikely to repeat. These factors should lead to a lower rate of inflation in 2022.

The sharp rise in prices has left investors wondering if the Fed is “behind the curve.” In our view, the Fed is behind the curve on purpose as it does not want to prematurely tighten financial conditions before reaching its full employment goal. However, it can always “catch up to the curve” if needed.