Author: Danny Popescu | May 17, 2021
Equity markets lost value and renewed volatility last week as U.S. inflation for April was released. After Monday the North American indices dipped dramatically. Thankfully they regained a large portion of their lost ground by the end of the week despite ending the week “in the red”. Driving the drop is U.S. inflation that is larger than expected at 4.2% over one year ago and 0.8% more than the last reported month (March). The core inflation rate, which excludes food and energy, rose 0.9% over March. This is the largest one-month inflation increase in 40 years, which was 1981.
The Federal Reserve and other central banks will be paying close attention to inflation to determine if it is directly related to reopening during the pandemic. Many American states reduced restrictions simultaneously causing a surge in domestic demand, leading prices higher as supply lagged. Wage growth could guide price increases once short-term stimulus savings are spent. It appears, at this time, that wage growth is not positioned to fuel additional price increases.
It should be noted that during periods of inflation bond yields have tended to increase. The long-term allocation within an investment portfolio should be monitored continuously, this period of increased inflation and accompanying bond yields is no exception.
Canada’s inflation numbers will be released during the coming week, and are expected to mirror U.S. figures, but in a more muted manner since our reopening is lagging the timing in the U.S.
What’s ahead for this week and beyond?
In Canada, April’s housing starts, existing home sales, average home prices and retails sales will be announced. Inflation for April will also be released through the Consumer Price Index as we proceed toward the Victoria Day holiday observed this year on May 24th.
In the U.S., housing starts, building permits and existing home sales for April are the major indicators on the calendar.
Globally, China will announce its industrial production and retail sales, Japan will announce its Gross Domestic Product (GDP), trade balance, inflation and industrial production, Europe will also announce its GDP along with consumer confidence.
While pent-up demand is expected to generate strong earnings for companies, due to lofty public equity valuations, we continue to maintain a balance mix between public and private securities.
Have a great week.
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