The Week Ahead – Inflation Arrives

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

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Whether you are a SRI investor or otherwise, it has been a good time to be in the stock market lately. First stocks took off faster than just about anyone expected. Then the economy staged an unbelievable rebound and now inflation is taking off. Core CPI (Consumer Price Index ex-food and energy) came in at a 4.2% annualized rate for the month of March. With pent-up demand and the economy’s re-opening, it is not surprising that we are seeing inflation. What is surprising is that the bond market is taking it in stride. Despite inflation impulses, bond yields actually fell last week. With investors positioned for rising rates, combined with the disappointing news regarding the Johnson & Johnson vaccine, the bond market decided to take a breather from its seemingly inexorable push to two percent. The Federal Reserve has done an excellent job of keeping markets calm by convincing everyone that they are aware inflation will appear high, but that it is actually transitory and not structural. The reality is the economy has surged so hard that suppliers were simply not prepared. Bottlenecks have developed in the supply chain as demand has surpassed expectations. Given time, we believe supply will come online proving Fed Chairman Jay Powell correct. However, we tend to believe inflation will be stronger and go on longer than the Fed is anticipating. This will not only test the resolve of the Federal Reserve to keep rates at zero until 2024, but the market’s trust in the Fed’s rhetoric to do so.

One interesting statistic that has not received a lot of coverage is that the economic growth trajectory is actually above where it was pre-pandemic. The IMF (International Monetary Fund) now expects 2024 global growth to be 0.5% higher than what was forecasted before anyone ever heard of COVID-19. After a recession, we typically see a scarring effect where economic growth is permanently impaired. This might be the first global recession that actually put us on a higher path. A good indicator that shows this is the LEI (Leading Economic Indicators), which we will see on Thursday. Given the strong stock market, skyrocketing consumer net worth, and impressive jobs numbers, this number should be quite strong.

Data deck for April 19–April 23: