Investment planning; January inflation numbers and more.

• Three US indices hit new highs
• The January inflation numbers

 

Three US indices hit new highs

(AF4, FA7, LP2, RO2)

The trio of leading US market indices all hit new highs on Monday 8 February, but the US bond market is worth watching.

 

The Dow Jones Index, the S&P 500 and the NASDAQ Composite all hit fresh highs on Monday, having shaken off the GameStop-induced jitters around the end of last month. Bitcoin also hit a new all-time high, but that was down to the news that Tesla had placed $1.5bn of its funds in the cryptocurrency.

Less noticed was what happened in the US Treasury market. The yield on the 10-year Treasury Bond (the dotted line on the graph, plotted against the right hand axis) rose to 1.18%. It last reached that level in March 2020, just as the Federal Reserve stepped in to stop bond market liquidity problems. At the long end of the Treasury market the yield on the 30-year bond rose to 1.96%, its highest since mid-February 2020. Six months ago, as August began, the yield was 1.20%. Turn to the 2-year bond and its yield has changed little since the Federal Reserve cut its target rate to 0%-0.25% in March 2020. The 2-year bond now yields 0.113%, only 0.006% above the low of last August.

The rise in the 10-year and 30-year bonds relative to the 2-year bond means that there is now a sharply rising yield curve. This is normally taken as an indication that the market is anticipating a rise in inflation. If President Biden succeeds in implementing his $1.9tn stimulus package – and it is already through the Senate – then some economists see stimulated demand outpacing recovering supply as US Inc moves past the pandemic, with inflation rising as a result.

For now, it is the thought of $1.9tn fueling growth that is helping US stock markets to reach new peaks. That could change if the focus changes and rising bond yields start to erode the value of the hoped-for future profits.

Source: Investing.Com. 9/2/21

 

 

The January inflation numbers

(AF4, FA7, LP2, RO2)

The CPI for January rose 0.1% to an annual rate of 0.7%, 0.1% above market expectations according to Reuters. Across December to January prices fell by 0.2%, whereas they were down 0.3% over the same period a year ago.        

The CPI/RPI gap widened to 0.7%, with the RPI annual rate rising from 1.2% to 1.4%. Over the month, the RPI was down 0.3%.

The Office for National Statistics (ONS)’s favoured CPIH index was up 0.1% for the month to 0.9%.

Once again, the price data was collected in a period of lockdown, meaning the number of items in the CPIH ‘shopping basket’ that were unavailable to consumers in the UK jumped from just nine (or 2% of the CPIH basket by weight) in December to 69 (8.3%) in January. The ONS says that it “collected a weighted total of 88.2% of comparable coverage collected before the first lockdown (excluding unavailable items)”.

The ONS highlights the following as the more significant of the moves causing the rise in the CPIH inflation rate:

Upward

Furniture, household equipment and maintenance The largest upward contribution came from this category, with overall prices falling by 1.6% between December 2020 and January 2021, compared with a larger fall of 3.1% between December 2019 and January 2020.

Restaurants and hotels Despite lockdown, this category produced the second-largest upward contribution to the increase in inflation. Overall prices were estimated to have risen by 0.9% between December 2020 and January 2021, compared with a fall of 0.1% between December 2019 and January 2020. The word ‘estimated’ reflects the fact that, as the ONS says, “…many of the items in the restaurants and hotels category were unavailable to consumers in January and therefore the price movements have been imputed using the all-items CPI monthly and annual growth rates (for available items)”.

Food and non-alcoholic beverages This category yielded the third-largest upward contribution, with prices rising by 0.6%, compared with a fall of 0.1% between December 2019 and January 2020. The effect comprised small movements from a variety of product groups. Overall annual CPI inflation in this category remains negative, at -0.7%.

Transport There was also an upward contribution from transport. There were small upward contributions from transport services and both the purchase of vehicles and operation of personal transport equipment. There was much offsetting within transport services, with upward contributions points from air and coach fares being partially offset by downward contributions from rail and sea fares. Again, restrictions meant that all of these service prices were imputed rather than actually measured.

Downward

Clothing and footwear The only notable downward contribution was a large contribution from this category, where overall prices fell by 4.8% between December 2020 and January 2021, compared with a fall of 3.3% between December 2019

and January 2020. The ONS notes that prices usually fall between these two months but price movements across 2020 have been unusual compared with previous years and appear to have been affected by the pandemic.

Four of the twelve broad CPI groups saw annual inflation decrease, while five posted an increase and three were unchanged. Alcoholic beverages and tobacco was the category with the highest inflation rate at 3.2% (down from 3.6%).

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) remained at 1.4%. Goods inflation increased from -0.3% to -0.2%, while services inflation rose 0.2% to 1.7%.

Producer Price Inflation was -0.2 % on an annual basis, up from -0.5% in December on the output (factory gate) measure. Input price inflation rose to 1.3% from 0.6% year-on-year. The main driver here was petroleum prices.

The small increase in inflation comes ahead of a string of increases at the start of April, including utility price rises, Council Tax increases and the end of VAT holidays.

There may also be some inflationary effects from the reweighting of the price indices which took effect with this month’s figures. These would have normally been adjusted to take account of (pre-pandemic) 2019 expenditure. However, the ONS has attempted to adjust for 2020 expenditure patterns where there has been a change of more than 25%. So, for example, the weighting of restaurants and hotels in the CPIH index has fallen from 9.6% to 6.8% while food and non-alcoholic beverages is up from 7.9% to 8.9%. Eating in is the new eating out…

Source: ONS 17/02/2021