Stock Market Risks Pile Up

The gap between ordering a chip and delivery is still growing

Delta cases. Inflation. Fed tapering. China’s crackdown. These are among the reasons why investors could soon get more nervous about this stock market.

The S&P 500 hit another record on Friday after Jerome Powell’s dovish taper speech reassured investors. However, the mood seems more cautious compared with a few weeks ago, when companies were in the middle of a record-setting earnings season.

All the concerns boil down to one big debate: Has the recovery from the pandemic already peaked? That’s a question that will only be answered in the months ahead. For now, investors say they’re scouring through management commentary and economic data for any hint about what’s to come.

U.K. Wage Growth Hits a Record

Vacancies Pass 1 Million

U.K. wage growth hit a record as companies posted more than 1 million new job vacancies for the first time in an unprecedented scramble for staff following the loosening of lockdown rules.

Average earnings in the three months through June surged a record 8.8% from a year earlier, the Office for National Statistics said Tuesday. While the figure partly reflects distortions created by the pandemic, underlying wage pressures are also gathering pace.

The pickup underscores the scale of the recovery from the deepest economic slump in 300 years. Although the Bank of England expects strains in the labor market to prove temporary, policy makers warned this month that meeting the 2% inflation target will require a modest withdrawal of monetary stimulus.

UK inflation hits 2.1%

Inflation vaults past Bank of England target

British inflation unexpectedly jumped above the Bank of England’s target in May when it hit 2.1%, part of a post-lockdown climb in prices that is expected gather pace. The acceleration of the consumer price index from April’s 1.5% largely reflected how weak inflation was in May 2020 when the economy was reeling from its first tight lockdown. The figure represented the first time inflation has gone above the BoE’s 2% target in almost two years and was above all 33 forecasts in a Reuters poll of economists which had pointed to a rise in inflation to 1.8%.

Yields on British government bonds rose early on Wednesday with the yield on two-year gilts – which are sensitive to speculation about BoE policy moves – briefly touching their highest in nearly a month. Investors around the world are assessing the risks of a sustained jump in prices, especially in the United States where annual inflation hit 5.0% in May, the highest in almost 13 years, and where President Joe Biden has proposed a $6 trillion stimulus package.

The Consumer Price Index for April rose 4.2%

Stocks already lower

Red-hot consumer inflation data for April spooked markets and raised concerns that the Fed is wrong about rising prices being just temporary. If the Fed is incorrect, that means that it could begin to unwind its easy policies quicker than expected and ultimately raise interest rates.

The Consumer Price Index for April rose 4.2% from a year ago, the briskest pace since September 2008. Economists had expected a big number, of 3.6%, because of base effects accounting for last year’s weakness. But the CPI’s surge took markets by surprise, sending Treasury yields higher and stocks lower.

The CPI measures a basket of goods and energy and housing costs. Excluding food and energy, core CPI increased by 3% year over year and 0.9% on a monthly basis, compared with respective estimates of 2.3% and 0.3%. Stocks, already lower, buckled under the inflation worry when the Labor Department released its report at 8:30 a.m. ET Wednesday. Tech slumped and the losses on the Nasdaq accelerated. The index was down 2% in afternoon trading, while the S&P 500 was off 1.6%.


Yellen Says U.S. Inflation Risk Remains Small, Manageable

Yellen said that the US could see full employment next year

Treasury Secretary Janet Yellen said U.S. inflation risks remain subdued as the Biden administration pumps $1.9 trillion in pandemic relief into the economy and a return to full employment comes into view. “Is there a risk of inflation? I think there’s a small risk and I think it’s manageable,” Yellen said on ABC’s “This Week” on Sunday. Some prices that fell last year when the Covid-19 pandemic spread through the U.S. will recover, “but that’s a temporary movement in prices,” she said.

“I don’t think it’s a significant risk,” said Yellen, a former Federal Reserve chair. “And if it materializes, we’ll certainly monitor for it but we have tools to address it.”

Biden on Thursday signed into law the pandemic relief package, which provides funding for vaccinations and delivering aid to households, businesses and state and local governments. Yellen and other officials insist the aid – which comes on top of pandemic relief passed by Congress last year — is badly needed for an economy slammed by Covid-19, particularly low-income workers heavily represented in service industries, despite signs of recovery.

The inflation risk from Joe Biden’s stimulus plan is exaggerated

The challenge is to fight the economic crisis by raising demand

Rising US bond yields show that financial markets fear Joe Biden’s $1.9tn fiscal package may stimulate the US economy too much and lead to unwanted inflation. But will it? Although the US president’s stimulus package seems massive, it consists of several parts, each with a different economic impact. Nearly 40 per cent of the package, or $750bn, will be used to aid mass inoculations and fund states and local governments. This will not produce much of a boost to gross domestic product, although additional funding for local governments could reduce additional lay-offs, which is a positive.

About $1tn will meanwhile be used for direct income subsidies to households in the forms of rebate cheques, child tax credits and higher unemployment benefits. There is also $150bn of financial aid for vulnerable businesses. Overall, household and business subsidies total $1.15tn, although the size of the final package could be trimmed somewhat because of the resistance by Senate Republicans.