This week's message is really clear: the rapid rise in inflation is a purely temporary phenomenon and is clearly due to the economic conditions created from February 2020 onwards. The yield of the 10-year bond is now well below 1.50% and we may see it fall even below 1.0% over the next few days or weeks.
Markets rarely lie and falling bond yields are the result of sharply declining inflation expectations. The decline of interest rates makes stocks more appealing as it is one of the key parameters that leads investment funds to take greater risk.
Trying to stick together all the pieces of the puzzle of the last two months, there are some useful clues that suggest that the markets managed to lead out of the game, a percentage of small investors who created a frenzy.
We could record the following:
1. The slowdown in the rate of improvement of macroeconomic figures leads to the de-escalation of interest rates and this is expected to drive capital to the stock markets, which have already been hit in the previous period.
2. Technological stocks have been found at much lower levels and their valuations are now at long-term average levels. In addition, the losses, which in many cases reached 40%, have led to the appeasement of the crowd. There is no longer a buying frenzy from micro-investors.
3. The parabolic course of cryptocurrencies and the beginning of trading of the first bitcoin ETFs, led to an outflow of funds from the stocks to the cryptocurrency market. The collapse of the top 10 cryptocoins of this market with losses between 50% -90%, led to another scrapping. It is now possible for many investors to look for a safety nest again in the less volatile stock market.
Inflation: Keeps on galloping but no one worries anymore
Inflation on May was again higher than analysts' estimates. On May, inflation rose 0.6% compared to estimates for 0.5%, but was lower than 0.8% of April and this raises hopes for a downward trend in inflation. Even inflation, which excludes fuel and food prices, rose 0.7%. On an annual basis, inflation rose to 5%, the highest level since 2008.
As American citizens return to their daily routine, it seems that conditions for excessive demand for certain goods and services are being created. Air travel and travel and cars in general are responsible for most of the increase in inflation. This imbalance between high demand and in many cases limited supply creates the conditions for a significant rise in inflation and for this reason economists estimate that this is a transitional inflation. In addition, it is clarified that transitional inflation can last quite a lot.
The announcement of inflation triggered a new record high for the S&P 500, while gains were significant for both the Nasdaq and individual shares of the technology industry. The Health sector recorded significant gains for many of its major stocks and thus managed to move emphatically to a new high. The technology sector is now showing great momentum.