Investors shrug off hot CPI report, fresh record highs, too early for ECB to talk exit, bitcoin rebound extends

US inflation outperforms, but market response is measured

US stocks rallied to a fresh record high after investors realized the punchbowl of stimulus is not going away anytime soon.  In fact, stimulus will overflow through the summer as hot inflation in the US still looks transitory and as the ECB keeps a faster pace of bond-buying while showing hesitance to begin exit talk.  The S&P 500 rallied 0.6% to a record high but pared gains after failing to break through the 4,250 price barrier.

The inflation playbook heading into the summer is holding up nicely.  Wall Street saw the writing on the wall that pricing pressures were going to surge.  A stronger-than-expected inflation report initially sent the 10-year Treasury back above the 1.50% level.  Shortly after the key inflation reading of the week, the ECB raised their 2021 inflation forecast from 1.5% to 1.9%.  The US stock market continues to benefit from improving economic data, potentially transitory inflation, and no end in sight for stimulus domestically and over in Europe.

US Data

Consumer prices surged 5% year over year in May as the reopening of the economy accelerates.  Core inflation, which excludes food and energy prices, rose from 3.0% to 3.8%, the largest increase in nearly three decades.  Used car index continues to account for a good chunk of those gains and that will normalize once the chip shortage problem is rectified.  The used car market is still so hot that some dealers are offering to buy back recently sold cars at a higher price.

Worker filings for initial jobless claims continue to trend lower as employers struggle to fill open positions.  Continuing claims remained elevated but that should start to end once extended unemployment benefits start to end across half the country.

Real average weekly earnings in May fell deeper into negative territory, while hourly earnings modestly improved.  Given the distortion in the labor market, investors are ignoring this data series.

ECB

In the race to taper asset purchases, the ECB may have let the Fed take the lead.  The ECB policy decision went mostly as expected: ECB kept the main 7-day refinancing rate unchanged at 0.00% and maintained the Pandemic Bond Buying Program (PEPP) size at 1.85 trillion euro, with the program lasting until at least March 2022 or when the crisis ends.  Lagarde noted that it is too early to discuss PEPP exit, while that debate will probably heat up over the next few meetings.  With EU inflation expected to remain below the ECB target in the coming year, policymakers might be one of the slower central banks in lifting rates.  The euro danced all over the place following the US inflation data and ECB policy decision and presser, but has settled little changed on the day.

Bitcoin

Bitcoin got an added boost from the broad rally on Wall Street as investors looked beyond rising inflation readings.  Bitcoin headlines have turned bullish over the past couple of days as crypto traders embrace El Salvador’s decision to make bitcoin legal tender and as India pivots away from banning bitcoin.  The USD30,000 to USD40,000 remains intact for bitcoin and is welcomed news for longer-term bulls.  An extended consolidation is healthier for bitcoin right now as much of Wall Street remains on edge until clarity emerges over the US regulation and how quickly progress is being made over ESG concerns.

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