Markets do not fear inflation, and stocks will continue to rally, HSBC says


August 16, 2021: According to HSBC Wealth Management, Markets no longer fear inflation and are now focused on the spread of the delta Covid-19 variant.

On Thursday, Chief Investment Officer Xian Chan said that after a period of concern about persistent higher inflation, with investors assessing if the U.S. Federal Reserve may be forced to tighten monetary policy, markets are appearing to have gotten used to the concept.

Xian pointed out that while U.S. consumer price inflation remained high at an annual 5.4% in July, the 10-year U.S.

“There is normally a direct relationship amid bond yields and inflation expectations. If inflation is expected to be higher, then bond yields go up to reflect the likelihood of higher interest rates. Interestingly, bond yields have decreased after peaking in April,” Chan said.

As of Friday, in Europe, the 10-year Treasury yield decreased again to 1.3405%, above 1.7% in March. HSBC forecasts that it will decrease as low as 1% by the end of the year.

On Thursday, Meanwhile, the S&P 500 notched a new record high, and Xian highlighted that these market moves are occurring despite elevated inflation expectations.

The Philadelphia Fed’s ongoing survey of forecasters indicating that consensus expectations are for inflation to run at 2.4% over the coming five years.

“Even when analyzing stock market volatility, upon closer inspection, the S&P 500 has still pushed higher month since January, even after concerns around inflation. In May and June, when inflation fears were the biggest, delivered positive returns,” he said, adds that this all suggests financial markets are no longer afraid of higher inflation.

Xian noted that this does not necessarily mean investors will not get “spooked” by messaging on the intentions of Fed to taper its quantitative easing program, but said the Fed has thus far managed its tapering communications “pretty well.”

“Arguably, markets are now focused on the state of play regarding Covid, and in particular, the spread of the Delta variant,” he said.

Covid case numbers are increasing again in various parts of the world, with several countries, mostly in Asia-Pacific, reintroducing containment measures in the latest weeks. However, the U.K. and others have forged ahead with reopening their economies.

“But regardless of where you look, the general view is the broad success of vaccination programs will allow the recovery story to keep in H2 this year,” Xian said.

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