Week in Review: Growing Inflation Concerns

Global equities retreated earlier in the week as higher-than-expected U.S. inflation numbers “spooked” markets. The catalyst for the pullback was the release of April’s Consumer Price Index (CPI), which saw U.S. inflation rising 4.2% year-on-year and 0.8% month-on-month. U.S. core inflation which excludes energy and food, increased by 0.9% in April, the most in nearly four decades and roughly triple consensus estimates.

Federal Reserve officials however remain adamant that rising prices in the U.S. will not last and don’t require any course correction yet. “We will not overreact to temporary overshoots of inflation,” Governor Christopher Waller said. Wednesday’s CPI report was “unexpectedly high,” but several more months of data are needed to judge the strength of the recovery, he added.

At the same time, Bitcoin came under pressure after Elon Musk criticised the crypto currency around its energy impact and that he would no longer be accepting Bitcoin to pay for Tesla cars. Not helping matters, Binance the world’s largest crypto exchange, is under investigation by the U.S. Justice Department and Internal Revenue Service.

Concerns over the hacker-induced shutdown of a major U.S. gasoline pipeline operated by Colonial Pipeline, the primary supplier to much of the U.S. East Coast, faded over the week as operations were partially restored on Wednesday evening. Colonial Pipeline paid close to $5 million to foreign hackers in an effort to keep fuel flowing. The ransom was paid in cryptocurrency.

The UK government said further relaxations of its lockdown would go ahead on May 17, even though there are worries about the Indian variant. UK GDP declined by 1.5% (quarter-on-quarter) in the first 3 months of this year, slightly better than market expectations for a decline of 1.6%. At the same time, GDP grew by 2.1% in March, ahead of expectations, as the reopening of schools, vaccine rollouts, and pickups in the retail and construction sectors started to benefit economic activity.

Meanwhile, the European Commission revised its 2021 economic forecasts from 3.8% to 4.3%, as rising vaccination rates, the prospect of easing lockdowns and improving export demand prompted upward revisions.

In the U.S., the Centers for Disease Control and Prevention said fully vaccinated people do not need to wear masks anymore or keep physical distancing, in the most significant shift in U.S. federal guidelines since the pandemic started. The Biden administration said it will begin updating its guidance for travel, schools and other sectors, likely further relaxing rules across the U.S.

For the week, global equity markets were softer. In the U.S., the Dow Jones (-1.14%), S&P 500 (-1.39%) and Nasdaq (-2.34%) were all weaker. Similarly, the Euro Stoxx 50 (-0.42%), FTSE 100 (-1.21%) and Nikkei 225 (-4.34%) were all negative with the Shanghai Composite Index (+2.09%) being the outlier.

Market Moves of the Week

The National Department of Health said in a statement on Wednesday that South Africa had not yet hit a third wave, but the country is at risk. A sustained increase in the positivity rate could force President Cyril Ramaphosa to consider reintroducing lockdown measures to curb the spread of the disease. New Covid-19 infections climbed 46% in the past week with cases rising fastest in the Northern Cape and Gauteng.

The JSE All Share Index ended the week down -2.80%, with all the major sectors negative over the week.

Chart of the Week

The South African Rand has been the best performing emerging market currency against the U.S. Dollar this year. With peer emerging market countries such as India and Brazil experiencing a severe wave of COVID-19 cases and Turkey and Russia coming with its own geopolitical risks, the rand has taken advantage of a bad situation.