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Today's markets: Muted start for equities, inflation in focus, Rolls Royce revs, housebuilder updates & more

The S&P 500 closes above 4,700 for first time, while the possibility of new lockdowns worry Europe
Today's markets: Muted start for equities, inflation in focus, Rolls Royce revs, housebuilder updates & more
  • Another record close on Wall Street
  • Inflation remains in focus
  • Rolls Royce lifted by nuclear news

Markets latest... Mixed, flattish start to trading for European stock markets after a record again on Wall Street as the S&P 500 closed above 4,700 for the first time. Gains of about 0.1 per cent for the DAX and FTSE 100 keeping risk just in the green but the Stoxx 50 is flat. For US stocks it’s been a straight line up since the middle of October and whilst there is always this sense that ‘it must pull back soon’, that is sometimes when it’s finding the path of least resistance to the upside. Talking of which, Bitcoin has made a fresh all-time high and now could generate further upside now that resistance has been cleared. Infrastructure stocks performed well as the market reacted to the passing of the $1tn infrastructure spending bill.

Covid caution... Risks are starting to take shape around rising covid cases in mainland Europe and the possibility of new lockdowns – something to watch in the coming days as it could play out with weakness for European equities. German infection rate at the highest since the pandemic started. Meanwhile the inflation threat looms as large as ever – tomorrow’s CPI numbers for the US will be closely assessed. Today we get the PPI numbers which are going to show ongoing supply chain pressure and pass through of costs to consumers, with the consensus at +0.6 per cent for the headline number and +0.5 per cent for the core PPI. Recent PMI surveys point in one direction for prices and that’s up.

On the whole inflation/rate hike theory... Yesterday, Fed mouthpiece Richard Clarida said conditions for rate rise likely to be met by end of 2022. Markets currently pricing for one by middle of next year, so the Fed remains ‘behind the curve’. An alternative way to put this – as last week showed – is to say the market is ahead of itself.  

Unspent stockpiles... He also pointed out there is about $2tn in unspent free money accumulated during the pandemic that is yet to wash through the economy. Does that make inflation likely to be more or less transitory...? 

Yet more sticky signs... In August, Jay Powell noted that "if wage increases were to move materially and persistently above the levels of productivity gains and inflation, businesses would likely pass those increases on to customers, a process that could become the sort of ‘wage–price spiral’ seen at times in the past." 

He went on... "Today we see little evidence of wage increases that might threaten excessive inflation." 

Projecting ahead... Well, the latest NY Fed median projected year ahead household income growth jumped to 3.3 per cent in October from 3 per cent in September. That’s just as productivity in the US plunged 5 per cent in the third quarter to its lowest level in 40 years. Ok, so some of it is supply chain related, but the picture is not the one that the Fed has been describing. Meanwhile, median one-year ahead inflation expectations rose 0.4 per cent to 5.7 per cent in October, reaching a new high for the survey launched in 2013. Clarida noted that the Fed had not anticipated the depth and breadth of the global supply shock. I guessed that but the question is – are you going to try to contain inflation expectations or not?

Charts

Sterling... has found some near-term support and trying to now hold the 61.8/38.2 per cent levels where there is clear near-term resistance to the bounce – eyes on the speeches of Bailey and Broadbent today.

Gold... Real rates under pressure again with 10-year TIPS out to –1.11 per cent, testing the first area of resistance at the 38.2 per cent retracement around $1,827, with further resistance at $1,833, the July and September peaks. Breach to the upside here may call for $1,875. Persistently high inflation and a dovish/patient Fed is a good setup for the metal – the sharp fall real yields since last week’s meeting tells you that. Weaker dollar also a factor with DXY down under 94 again to test its 20-day SMA after once again failing to break out above 94.60 area last week, just as it failed in Sep and Oct.

Neil Wilson is the Chief Market Analyst at Markets.com