U.S. Federal Reserve officials this week again stressed that the current higher inflation rate wouldn’t last long enough to put pressure on the U.S. economic rebound. The term transitory thus remained the key theme surrounding inflation, which helped calm investors nerves about the U.S. tightening its monetary policy. Continuing with this theme, mixed U.S. economic data released this week, such as the fall in weekly jobless claims and lower than expected manufacturing gauges, further calmed investors worried about an overheating U.S. market. Although long-term inflation concerns have subsided, the U.S. Department of Commerce announced on Friday that the core personal consumption expenditures index increased 3.1% year over year. Fed officials attributed this temporary rise to base effects and production bottlenecks.
President Biden proposed the largest U.S. budget ($6 trillion) since World War 2. If successful, total spending would rise to $8.2 trillion by 2031 while deficits would run above $1.3 trillion over the next 10 years. Forecasts also suggest that total U.S. debt would rise to 117% of gross domestic product by 2024. The plan assumes a steady inflation rate and a capital gains tax hike in 2021.
In a similar story to the Gamestop saga, retail investors continued to show their influence on the market as the share price of the “meme stock” AMC skyrocketed this week on the news that large influential investors were shorting the stock. Short sellers are estimated to have lost a massive $1.2 billion this week. Bitcoin remained extremely volatile this week as numerous events surrounding the crypto currency took place: Iran banned the mining of cryptocurrencies, Elon Musk tweeted that he is pushing to make crypto mining more sustainable, and Cathy Wood’s ARK Invest bought $20M worth of the currency.
European markets moved positively on the news that accommodative monetary policies were there to stay. On another positive note, a Dutch court ruled that Royal Dutch Shell has to take accountability for its contribution to climate change and ordered the company to lower its CO2 emissions. This increases the support for the worldwide sustainability movement as the ruling was the first of its kind.
China and Washington held their first trade talks since the election of Joe Biden, with both sides agreeing on the importance of their bilateral trade relationship. Earlier this week, China banned the selling of commodities to retail investors in an attempt to halt the current surge in commodity prices.
Japan remains in a state of emergency as their recent widespread Covid-19 outbreak continues. As a result, doubt has risen over Tokyo’s plan to host the Olympics in less than two months. Japan’s vaccination programme and their ability to contain this outbreak will remain in the spotlight over the coming weeks.
For the week, global equity markets were positively steady. In the U.S., the Dow Jones (0.94%), S&P 500 (1.16%) and Nasdaq (2.06%) were all stronger. Similarly, the Euro Stoxx 50 (1.11%), FTSE 100 (0.06%), Nikkei 225 (2.94%) and Shanghai Composite Index (3.28%) all ended the week in the green.
Market Moves of the Week
In South Africa, power utility Eskom managed to reduce its debt by almost a fifth, which was well received by the market. This was due to the company managing to repay matured loans while benefiting from a more favourable exchange rate. On a negative note, South Africa reported a 33% jump in daily Covid-19 infections on May 26. The government has been considering bringing back some stricter lockdown measures to try help curb the recent spike in infections.
The JSE All Share Index ended the week at its best level in three weeks up 1.99%, after South African companies’ results continued to surprise to the upside with improved corporate earnings.
Chart of the Week
U.S. market-based inflation expectations for the period 2026 to 2031 have calmed down of late, after a spike to 2.4% earlier this month. Since then, expected rates have fallen back closer to 2.2%, the kind of level that the Fed now says it would be happy to tolerate.