Monthly Market Overview – June 2021

Despite another month of strong economic data, global markets went largely sideways in May. The welcomed success of the vaccine rollout in many countries is allowing for the unlocking of economies and a gradual return to normality. However, this has been partly overshadowed by a sharp pickup in inflation and a rising concern that this could lead to central banks withdrawing some of their stimulatory policies.

Regarding market returns, both UK and US equities rose by around 1% in local currency terms while European and Emerging Market bourses slightly outperformed. However, the pace continued to be set by pro-cyclical and ‘value’ sectors such as financials and energy while areas like technology lagged. There was a similar story in fixed income markets with muted returns in most areas including gilts and investment grade corporate bonds. The notable exceptions though were inflation-linked bonds and gold, both of which not surprisingly benefitted from the increased focus on rising consumer prices.

Over the course of the month, there were two data points that really caught the attention of investors. The first was US nonfarm payrolls which embarrassed a few economic forecasters by being significantly below expectations with only 266,000 jobs created in April instead of the anticipated 1 million. This sparked fears that employers were struggling to attract people back to work due to a combination of Covid-19 fears, generous unemployment benefits and a lack of childcare provision, in which case wages might well have to go up in order to fill vacant positions.

The second data point of note was the US Consumer Price Index (CPI) which exacerbated those concerns by coming in comfortably above forecasts at 4.2% on the year, the highest level since 2008. A lot of that rise was clearly driven by base effects in areas like energy costs which had fallen sharply twelve months previously during the beginning of the pandemic. There were also price increases in categories that could be dismissed as transitory and driven by the economic re-opening such as airfares and used car prices. However, many investors were concerned that inflation expectations would become ingrained amongst producers and consumers and soon require a response from central banks.

Despite the strong CPI data, the Federal Reserve stuck gamely to their message that they were in no rush to slow the pace of quantitative easing (QE) and were still a long way off from raising interest rates. In its view, inflationary pressures were likely to ease as the year went on and they also felt that labour markets would take time to recover back to pre-Covid conditions. So far, this has reassured markets although it can only be a matter of time before policymakers start discussing a tapering of QE asset purchases.

Otherwise, most economic data was very encouraging and supportive of equity valuations. This included the PMI activity indicators in both the manufacturing and service sectors. In the UK, the composite PMI hit 60.7 while retail sales were up a whopping 9.2% in April as lockdown measures eased, providing a boost to the value of sterling. The news out of Europe was a bit less encouraging due to the slower rollout of the vaccine but this was clearly picking up pace in May suggesting better economic times ahead. As with the Fed, there was no major change in message from the Bank of England and European Central Bank even if they are keeping a close eye on inflation.

Looking ahead, we expect the backdrop to remain relatively supportive for equity markets with GDP growth likely to be very strong in Q2, especially in the UK and the US. However, the pandemic is far from over with many countries still struggling to vaccinate enough of their population to allow a return to some form of economic normality. We expect inflation fears will continue to be elevated for now as it will take time to discover whether rising price pressures is a temporary phenomenon or the start of something more sustained. As ever then, the focus will be on the reaction of central banks to the data but we expect policymakers to remain dovish for now.