Markets upbeat following Fed’s calming signals on inflation spike

Traders confident central bank is likely to maintain ultra-loose monetary policies for some time after Washington dismisses panic over forecast-busting 5% inflation figure

Most markets rose on Friday after a record lead from Wall Street as traders bought into the Federal Reserve narrative that surging US inflation was only temporary.

Traders saw that as a signal the central bank was likely to maintain its ultra-loose monetary policies for some time.

In Asia, Hong Kong, Sydney, Seoul, Singapore, Mumbai, Wellington, Bangkok, Taipei and Manila all rose, while Tokyo was flat, and Shanghai and Jakarta dipped.

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The keenly awaited US consumer price index for May came in at a forecast-busting 5% annually, well up from April and the highest in 13 years, owing largely to a spike in energy costs and the low base of comparison with 2020.

The three main New York indexes initially fell on the announcement before rebounding, with analysts pointing out that prices rose less than expected on a monthly basis.

There has been a growing concern that the blockbuster recovery in the global economy – supported by stimulus, reopenings and vaccinations – will send inflation soaring and force central banks to taper their market-boosting monetary policies, which include record-low interest rates.

KEY GAUGE

However, observers said that while those fears linger, the Fed’s insistence that the expected jump in prices will only last a few months appears to be getting through with the yield on benchmark 10-year Treasuries – a key gauge of future borrowing costs – at their lowest since March.

“The frothiness in CPI continues for now but between base effects and pent-up demand pressures, it is probably not giving a definite answer to the great inflation debate, and you need to read the bond market tea leaves,” said Anu Gaggar, of Commonwealth Financial Network.

“The bond market is falling in line with the Fed’s thinking that inflation is transitory and does not warrant tapering of monetary stimulus any time soon.”

TAPER WORRIES

On Wall Street, the Dow and Nasdaq both enjoyed healthy gains, while the S&P 500 hit an all-time high as taper worries subside for now.

Traders will this weekend be keeping an eye on the G7 summit in Cornwall – marking the start of Joe Biden’s first foreign trip as president – where they have pledged to donate a billion vaccines for the world’s poorest countries, while other issues will be on the agenda including China and climate change.

Oil prices edged up, reversing earlier gains, as the International Energy Agency said demand was set to rise above pre-pandemic levels by the end of next year.

MARKETS
Tokyo – Nikkei 225: FLAT at 28,948.73 (close)
Hong Kong – Hang Seng Index: UP 0.4% at 28,842.13 (close)
Shanghai – Composite: DOWN 0.6% at 3,589.75 (close)
New York – Dow: UP 0.1% at 34,466.24 (close)