This week the spectre of inflation rattled markets, although some were less rattled than others. Stock markets, and the high-flying tech stocks in particular, were the most jittery with multiple swings up and down. Bond markets, which are more directly linked to inflation and interest rate expectations were far more prosaic. The catalyst for this was the release of some inflation statistics in the US that showed consumer prices rose by the most in 13 years, with the headline rate climbing over 4 per cent in the previous 12 months.
Equity investors are terrified the central bank might stop pumping money into the markets. This fear wasn’t helped by a cyber attack that closed down an oil pipeline serving most of the east coast. Inflation and people queuing for gasoline was just a bit too on the nose. Bond investors are of the view that while shops can open almost instantly, factories will take longer to get back up to full speed. In the short term this could cause bottle necks and we’ll see some short-term inflation while things get back to normal. By the end of the week the later view appears to be winning out
UK: GDP GROWTH WAS RESILIENT IN THE FIRST QUARTER
The UK’s economy shrank by 1.5 per cent in the first three months of the year helped by strong economic growth in March as the most recent lockdown began to lift. The figure was far better than the 2.8 per cent contraction seen for the same period last year as government spending and a big increase in online activity since the coronavirus outbreak helped to mitigate some of the effects of lockdown. Bank of England chief economist Andy Haldane said the rebound in the economy could see the UK grow the fastest of any G7 nation this year.
The strength of the recovery is seen in other data out this week. The number of people starting new businesses is up 22 per cent on last year to the highest level in 10 years. The latest UK trade data also shows a picture of recovery, with imports and exports both
increasing. However overall trade levels remain below pre-pandemic levels and trade with Europe, in particular, remains depressed.
US: SHARP RISE IN INFLATION SPOOKS EQUITY MARKETS
A rise in US inflation sparked a sell-off in global equities this week. US Consumer Price Inflation rose to 4.2 per cent in April, up from 2.6 per cent in March, reviving fears that the US Federal Reserve may increase interest rates sooner than expected. The White House council of economic advisers said this “normalisation” of prices is expected and inflation should fade as recovery from the pandemic continues. The US Federal Reserve also said it expects inflation to return to target without the need for intervention.
Despite the calm official response, US stocks had a bumpy week. The S&P 500 fell in advance of the inflation report and closed 2.9 per cent lower on the day. The technology heavy Nasdaq, which has companies that are more sensitive to higher inflation and interest
rates, lost roughly 3.7 per cent. Many global markets also fell. US government bonds, which are usually more sensitive to changes in interest rates, fell slightly but were less affected than equities and yields remain below the level in February
EQUITIES: TRAVEL COMPANIES WAITING FOR THE POST-PANDEMIC BOOM
Travel companies are predicting a big increase in bookings as national and international travel restrictions begin to ease. International travel will be permissible from Monday, while hotels, B&Bs, cafes and restaurants in most parts of the UK will also be able to open. The chief executive of home-rental company Airbnb this week predicted the travel rebound of the century as it reported bookings up 13 per cent on the first quarter of 2020 and revenues for the first three months comfortably exceeded expectations.
TUI is also expecting to see bookings rebound this summer as vaccination programmes open the way for international travel. TUI unveiled a pre-tax loss of €1.5bn for the last six months but predicts it will be back in profit by the end of the summer as bookings are
already picking up. Despite the optimism there is considerable short-term uncertainty for the sector. British Airways owner IAG this week issued an €825m convertible bond to boost its cash reserves and most travel stocks remain far below pre-pandemic levels.