While the economic recovery continues to broaden dramatically on news of global vaccinations and unprecedented economic stimulus, volatility in investment markets has picked up in recent weeks. Good economic data continues to be seemingly limitless, but risks to the positive market story continue to rise. With this as a backdrop, concerns around inflation, peak economic growth, and potential rising taxes have been impacting the day-to-day market movement.
The economic re-opening continues to be the main driver for markets, and the acceleration of economic change because of the pandemic possibly creates a compelling longer-term investment story.
Here's what we are reading this week:
The market focus is on the restart and inflation - and less on geopolitical risks – yet it’s worth watching specific risks as flareups could catch investors off guard.
Inflation expectations eased on lower oil and commodity prices. We expect volatile near-term data amid pent-up consumer demand and supply shortages.
Data are expected to show the U.S. personal consumption expenditure (PCE) price index rose 2.8% in April, above the Federal Reserve’s inflation target.
Notes on the Week Ahead -- U.S. Housing - Booming not Bubbling -- Dr. David Kelly, JP Morgan Asset Management
"As the economy recovers from the pandemic, the housing industry is booming. However many Americans remain wary of real estate, having been badly burnt in the first decade of this century when a U.S. housing bubble ultimately triggered the worst recession since the Great Depression.
However, the reality is more nuanced this time around. So far, the increase in home prices is more moderate than fifteen years ago, particularly given current super-low mortgage rates. In addition, residential real estate could provide a hedge against now rising inflation."
Capital Group published a commentary noting that while US government debt is a concern, taking us back to levels of debt not seen since World War II, it may not spiral out of control. While the level of government debt is high, it is elevated in other mature economies as well.
The fact is that a debt crisis arises when investors are no longer willing to purchase a country’s debt. When that will occur is very difficult to predict, although it does not seem likely to happen in the U.S. anytime soon. Traditional analysis suggests that debt levels are sustainable as long as the cost of debt remains below the level of economic growth, but there are still likely limits. What they are, however, is unclear.