Still transitory

19 July 2021

In this week’s Market Pulse, Chief Investment Officer Bernard Swords reflects on why concerns over the growth outlook are capturing more attention than the inflation outlook as well as the early themes that are emerging from Q2 earnings season.

  • There was another big CPI figure in the US accelerating on a MoM and YoY basis but curiously the bond market barely fluttered. But as we were saying last week the growth outlook was capturing more attention than the inflation outlook.
  • Could it turn grim? We expect the economic momentum to fade but remain well above trend. Last week we did see some glimpses to support that. Firstly China, leading the global recovery and leading the fade. In the Q2 GDP report, released last week, annualised growth was 7.9%, below the 8.5% forecast for the year but the June releases in it (Retail Sales and Industrial Production) showed strong rebounds. The growth rate may be fading but stabilising at a relatively high rate.
  • Pulling all this together we have elevated inflation which still looks like it will subside and anyway central banks do not seem alarmed by it. Hence although we would expect yields to rise in the fixed income markets, they are likely to remain orderly. There are a lot of signs of slowing momentum in the global economy, but the growth rate remains high which will continue to drive strong earnings growth and thus the environment remains equity friendly and it remains the asset class of choice. 
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