- European markets continue to rise
- Eyes on Fed for inflation action indicators this week
- Bitcoin given (another) Musk bounce
European stock markets rose in early trade Monday, with the DAX in Frankfurt hitting a new all-time high and the FTSE 100 making a fresh post-pandemic high above 7180 as the broadly positive mood in equity markets continued to override concerns about inflation. Travel shares like IAG and EasyJet fell as it appears all but certain England’s full reopening will be delayed by another 4 weeks. Markets are now caught between last week’s big inflation reading and this week’s Fed meeting. Despite the big inflation reading from the US, inflation expectations are not really rising which should allow the Fed to keep its dovish stance. Treasury yields have held under 1.5 per cent, indicating investors are buying the transitory story for now. Nevertheless, I’d expect these to take offer at some point and for 10s to retest 2 per cent in the coming months.
Wednesday’s statement from the Federal Reserve is not expected to feature any fireworks, but it is an important meeting as it will offer clues about the reaction function of the central bank to rising inflation. We know the Fed is happy to let inflation run a little hot over the summer as it pins everything on its employment mandate. So, labour market data is arguably more important than inflation numbers right now. On that front the last NFP jobs report was something of a Goldilocks number – not too hot to worry about an early taper of the Fed’s $120bn-a-month bond buying programme, but not so cool as to fret about the recovery. The truth is the Fed is looking at both and this meeting comes at a time of great uncertainty over whether inflation will indeed prove to be as transitory as policymakers believe.