Citi Personal Wealth Management

Inflation is Here. Will it Stay for Dinner?

Weekly Market Update | October 18, 2021

Highlights

Stocks posted solid gains across most regions last week as strong bank earnings and a more stable 10-year U.S. Treasury yield bolstered risk sentiment. In the U.S., the S&P 500 climbed 1.8% while the NASDAQ jumped 2.2%. Non-U.S. markets posted solid gains as well with European stocks rising 2.9% and Emerging Market stocks surging 2.1%. Japanese stocks returned 1.6%. The 10-year U.S. Treasury yield closed the week 4 basis points lower – falling from 1.61% to 1.57%.

Inflation appears to be transitioning from “transitory” to “persistent.” Rising energy and shelter prices are leading investors to believe that inflation may endure over a longer period than originally thought. We still envision a lower rate of inflation in the twelve months ahead, but the rate of inflation will likely continue to overshoot the Fed’s 2% inflation goal for some time.

That does not mean that we are entering a period of stagflation (high inflation, little to no growth, and rising unemployment). Growth forecasts have come down for the third quarter of 2021 with the consensus looking for an annualized rate of just 3.1% growth, but economic activity should pick up in the fourth quarter. We also feel encouraged that the yield curve remains far from inversion and leading economic indicators remain elevated. This suggests to us that there is likely a lengthy runway for the economy to expand.