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LGT Navigator: Inflation fears increasingly depress stock market sentiment

February 18, 2021

Increasing fears that the massive economic stimulus packages and ultra-loose monetary policy of the central banks could lead to a sudden rise in inflation are currently putting the brakes on the record chase on the stock markets. In its minutes, the US Federal Reserve was somewhat more optimistic about economic developments in the United States. Meanwhile, the latest data from the US retail sector point to a more robust than believed consumer climate. The news that Pfizer/BioNTech's Covid-19 vaccine also offers protection against the South Africa mutation, according to the latest studies, is likely to be received positively.

Inflation fears increasingly depress stock market sentiment

After a weak start to trading, the Dow Jones Industrial climbed to a new record high of 31,643 points and then closed with a daily gain of +0.29% at 31,613.02 points. The S&P 500 was virtually unchanged at 3,931.33 points (0.03%). On the Nasdaq technology exchange, the reallocation of investor legend Warren Buffett from Apple shares to standard stocks caused a lot of talk. The Nasdaq 100 closed -0.54% lower at 13,699.71 points. The central theme currently remains, however, mainly the increasing inflation concerns, which could lead to an unexpectedly sharp rise in interest rates. Most recently, US government bond yields had risen to their highest level in about a year.

Strongest rise in US producer prices since December 2009

Producer prices in the United States rose much more sharply than economists had expected at the start of the year, fueling increasingly acute fears of a sharper rise in inflation and, as a result, rising interest rates. In January, US producer prices rose sharply by +1.3% month-on-month – the strongest increase since December 2009. Analysts had on average expected an increase of only +0.4%. On an annual basis, producer prices rose by +1.7% and at the core rate, i.e. excluding energy prices, by +2.0%. Generally speaking, producer prices provide an early indication of the development of inflation.

US consumption in the US more resilient than expected 

Sales in the US retail sector increased much more strongly than expected in January. On a monthly basis, retail sales rose strongly by +5.3%, while the market had anticipated a much more moderate increase of +1.2%. This was after sales had declined by a revised -1.0% in December. Analysts pointed to the direct aid from the stimulus packages, which should encourage consumers to spend despite the ongoing tense pandemic situation.

Fed moderately optimistic in economic outlook

In the minutes (Minutes) of the latest monetary policy meeting of the US Federal Reserve (Fed) on January 27, released last night, the Fed expresses more confidence about economic developments. The government's stimulus programs and the Covid-19 vaccines are giving the economy a significant boost, the Fed noted. But it will take some time before “substantial progress“ is evident, it said. Therefore, it said, the Fed must maintain its expansionary stance over the medium term, i.e., keep interest rates at record lows and continue securities purchases and lending programs. However, the danger of the economy overheating as a result of the stimulus packages is also being discussed at the top of the Fed.

Slightly higher inflation rate in the UK

British consumer prices rose slightly more at the beginning of the year. In January, the annual inflation rate increased to +0.7% from +0.6% in December. According to the statistics office ONS, higher costs for food, household goods and furniture were decisive for the slightly stronger inflation in January.

Draghi wants to lead Italy out of the corona crisis

Italy's new Prime Minister Mario Draghi has called on politicians to stand together in the fight against the corona pandemic. “Unity not an option, but a duty,“ Draghi said during his inaugural speech to the Senate in Rome. The former ECB chief cited a rapid Covid-19 vaccination campaign and reforms in the economy and administration as the most important goals of his bipartisan government. Turning to Brussels, Draghi stressed that the use of the corona aid of around EUR 210bn would be in compliance with EU requirements and would strengthen digital innovation and ecological transformation as well as social equality.

 

Economic Indicators February 18

MEZ Country Indicator Last
10:00 EZ ECB Minutes
14:30 US Housing Starts (January, m/m) +4.2%
14:30 US Building Permits (January, m/m) +5.8%
14:30 US Initial Jobless Claims (weekly) 793,000
14:30 US Philly Fed Manufacturing Index (February) +26.5
16:00 EZ Consumer Sentiment (February) -15.5

Earnings Calendar February 18

Country Corporate Period
SZ Credit Suisse Q4
SZ Nestlé Q4
GE Daimler Q4
FR EDF Q4
FR Carrefour Q4
SP Repsol Q4
UK Barclays Q4
US Walmart Q4
US Marriott International Q4
CAN Barrick Gold Q4

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, +41 44 250 78 59, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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