Stock markets are in good shape as the weekend approaches thanks to the Biden administration’s plans to spend more than $1 trillion on infrastructure. The Democrats brokered a deal with Republicans to ramp up government spending in a bid to boost infrastructure as well as helping the economy recover from the pandemic. Stock markets in Europe are in positive territory and we have seen a fresh record high on the S&P 500.
The bullish move in the US comes at a time when inflation is moving higher. The core PCE reading is the Federal Reserve’s preferred measure of inflation, and it increased to 3.4% - the highest since 1992. The report strips out volatile price components such as food and energy, so it gives a better gauge of underlying demand. It is clear that demand is rising but the latest update from the Federal Reserve made it clear that higher prices will only be transitory. In a way, the jump in demand is a win-win scenario, because strong consumer activity should propel the economy along but at the same time, it seems like the Fed will keep rates at rock-bottom levels in the near-term.
Last week, the US dollar hit its highest mark since early April, but it is now on track to finish in the red for its fifth day in a row. It appears the greenback is under pressure as currency traders feel the Fed will not lift rates in the short-term. The dollar is still comfortably higher than the pre-Fed meeting level, so the broad rally from late May in still intact. Gold and silver are showing relatively small gains considering the move lower in the dollar. In the past 48 hours, gold has traded in a small range and even though is it off the lows of the week it has not mustered up the energy to try and retest the $1,800 zone, which could be a signal of weak appetite.
Sterling is still suffering from yesterday’s Bank of England update. Monetary policy was left on hold, meeting expectations. The BoE cautioned that even though they anticipate higher growth, it would be a mistake to tighten monetary policy too soon. CPI in the UK is 2.1%, and the UK central bank warned that it might rise beyond 3%, but the body echoed the Fed as they anticipate any inflationary pressure will only be temporary. For the time being, it appears that central banks will just have to grin and bear higher inflation.