Blog: You, us, everyone

Rising inflation fears seem to be the one of the reasons of yesterday’s correction. The bond market has lifted the five-year inflation outlook to the highest since 2006, while one of the oldest hedges, gold, is holding near three-month highs. Oil is also dropping. All of which means tomorrow’s U.S. CPI number has gained even more significance for investors.

That comes after last week’s mixed bag of messages.

• Last week, US Treasury secretary and former Federal Reserve chair Janet Yellen claimed that interest rates may have to rise! She spells out on a subject where her current role is not having a bearing on monetary policy making. A sell-off in markets followed, particularly within highly valued sectors. Yellen later backpedaled on her comments, encouraging a recovery in markets.
• The Bank of England took the decision to reduce its pace of bond purchases on the back of a strong domestic economy.
• The European Central Bank Governing Council member said its emergency bond purchases could also be scaled back as early as June.
• And to seal off the week, Friday’s weaker-than-expected jobs report reinforced the Federal Reserve’s dovish stance. Long-term interest rates declined as did the US dollar, and the S&P 500 touched a new high. All of these events drove an increase in short-term market volatility.

We have become somewhat more cautious on equities' short-term prospects especially as political noise appears to be regarded than fundamentals. Yet, we believe that long-term prospects of high-quality secular growth stocks remain valid as the higher EPS expectations cover the short-term volatility. Also, we note that these stocks will recuperate first after a market correction.

While US companies are struggling to fill jobs, it appears that many workers may prefer to stay home and collect generous unemployment allowances. Because this reflects more of a jobs demand than a jobs supply imbalance, firms may have to raise wages, eventually leading to higher inflation. In anticipation of this, the inflation breakeven rate broke above 2.5%, its highest level since 2013.