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LGT Navigator: Rising inflation expectations and higher bond yields take the momentum out of the stock market rally

February 17, 2021

After the extended weekend, the friendly mood on the US stock markets continued on Tuesday and the indices reached record levels again, driven by unbroken optimism among investors. On the one hand, hopes are rising that the corona crisis will soon be overcome thanks to advancing vaccination campaigns and falling new Covid-19 infection figures, and on the other hand, capital markets continue to rely on fiscal and monetary stimulus from governments and central banks. Higher bond yields due to rising inflation expectations are providing a damper.

Rising inflation expectations and higher bond yields take the momentum out of stock market rally

After the indices on the New York Stock Exchange initially reached new record levels once again, the momentum was lost somewhat by the end of the trading day. The Dow Jones Industrial exceeded the mark of 31'600 points for the first time, but then gave up again and closed +0.2% higher at 31'522.75 points. The S&P 500 also initially climbed to a new high at 3'950.43 points, but ultimately showed a virtually unchanged from Friday at 3'932.59 points (-0.06%). As a damper proved the rise in US government bond yields, which reached the highest level in about a year. The background is rising inflation expectations as a result of the massive stimulus measures to contain the corona crisis. The focus is also on rising oil prices. Thus, the price of US WTI crude climbed to more than USD 60 per barrel. The winter storm in large parts of the United States and Texas in particular could affect production and logistics.

In Washington, pressure is mounting on US Congress to finally pass the long-anticipated further corona stimulus package. In less than a month, millions of Americans will lose their unemployment benefits. This will also be the first major test for President Joe Biden, who is calling for a USD 1.9 trillion aid package. Biden is still hoping for a bipartisan agreement. However, the failed impeachment proceedings against former President Donald Trump have impressively shown that Republicans are unwilling to work together across party lines.

While the Chinese stock exchanges remained closed today due to the New Year's holiday, the stock indices in Asia are trading inconsistently. In Tokyo, the Nikkei 225 loses -0.6%, while in Hong Kong, the Hang Seng increases by about 1.2%. On Europe's stock exchanges today should again focus on some important corporate reports, the US retail sales figures and the highly anticipated first speech of the new head of government Mario Draghi (10:00 CET).

New York Empire State index points to continued recovery in the industrial sector

Sentiment among industrial companies surveyed by the New York Fed brightened more than expected in February. The so-called Empire State index improved by 8.6 points to 12.1 points compared with the previous month. Analysts had forecast an average increase of 3.5 to 6.0 points. A reading above zero signals growth in the regional industrial sector. The barometer of the Federal Reserve of New York has now been in positive territory for eight months in a row.

Investors more confident on their economic assessment according to ZEW survey

According to the Mannheim-based Center for European Economic Research (ZEW), analysts' and investors' expectations for future economic development in Germany and the eurozone have improved noticeably. The ZEW indicator increased from 61.8 points in the previous month to 71.2 points in February, while analysts had expected a decline to 59.8 points against the background of the economic restrictions caused by the corona crisis. Consumption and trade in particular are expected to catch up significantly, although this will also raise inflation expectations, commented the ZEW. The economic indicator for the euro area climbed from 58.3 to 69.6 points.

Meanwhile, Eurostat, the statistics authority, confirmed that economic output in the euro countries declined by -0.6% quarter-on-quarter in the final quarter of 2020, given the restrictions to combat the corona crisis. On an annual basis, the decline in gross domestic product in the fourth quarter was -5%. In 2020 as a whole, the pandemic caused the sharpest economic downturn in the history of the eurozone. GDP contracted by -6.8%. The slump was even steeper than the -4.5% recorded during the global financial crisis in 2009.

Australia's central bank signals long-term loose monetary policy

In its minutes of the February 2 meeting, the Reserve Bank of Australia (RBA) signaled its intention to keep interest rates at extremely low levels and continue bond purchases until inflation and wage growth pick up sustainably. In doing so, the RBA would also follow the monetary policy of other central banks in order to prevent an undesired appreciation of the Australian dollar.


Economic Indicators February 17

MEZ Country Indicator Last
00:00 CN Holiday
08:00 UK Consumer Prices (January, y/y) +0.6%
08:00 UK Core Consumer Prices (January, y/y) +1.4%
14:30 US Retail Sales (January, m/m) -0.7%
14:30 US Producer Prices (January, y/y) +0.8%
14:30 US Core Producer Prices (January, y/y) +1.2%
15:15 US Industrial Production (December, m/m) +1.6%
16:00 US NAHB Housing Market Index (February) 83.0
20:00 US FOMC Minutes

Earnings Calendar February 17

Country Corporate Period
SZ Schindler Q4
GE Beiersdorf Q4
FR Kering Q4
FR Capgemini Q4
NL Ahold Q4
UK Rio Tinto Q4


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