Stocks nudge higher, Fed remains relaxed about inflation

Stocks are higher, recovering some ground lost during a choppy week. Fed officials have been out in force to calm inflation nerves. Governor Christopher Waller said rates will not rise until policymakers see inflation above target for a long time or there is excessively high inflation, saying the Fed will need to see several more months of data. He also stressed that there is only a temporary ‘mismatch’ between surging demand for workers and people’s willingness/ability to get a job. Meanwhile businesses across the US are struggling to find labour: McDonald’s is the latest company to increase pay, raising wages by 10% at its US company-owned restaurants as it seeks to take 10,000 new staff over the next three months. Wage push inflation is of greater concern than short-term supply chain pressures and rising commodity prices. The labour market is far tighter than it looks – the Fed will hope that things change quickly once Federal assistance rolls off later in the year. That could see us endure a rough summer of hot inflation readings, with the Fed looking on and hoping it comes to an end in the autumn.

Another inflation gauge delivered a hot reading. US produce price index inflation rose 6.2% year-on-year, the biggest hike in prices over a 12-month period since the Bureau of Labor Statistics began measurements in 2010. Markets were a good deal calmer despite the figures, with Treasury yields easing of the 1.7% area, the highest in a month. The Dow Jones and S&P 500 both rallied more than 1%, whilst NDX rose over 100pts to make a decent fist of recovering the 100-day SMA, though it fell short and closed off the highs of the day.

European stock markets are broadly higher this morning, taking the positive cue from the US and a strong session in Asia. The FTSE 100 has recovered 7,000 following yesterday’s firm rejection of the area under 6,900. The UK blue chips closed a full 140pts off the lows on Thursday. This morning miners are notably weaker as iron ore prices fell in China, leaving basic materials the only sector in the red, while tech, utilities and consumer cyclicals lead the way higher. BT rallied 3% whilst Sage advanced by the same margin as it reported strong half-year results and said full-year revenues would be at the top end of guidance.

Airbnb shares fell 3% and extended the decline in after-hours trade as the company reported a net loss of $1.95 per share in the first quarter. But revenues were up 5%, beating analyst expectations, and gross booking value was up over 52% year-on-year to more than $10.3bn. Cancellation rates are still higher than in 2019. Chief executive Brian Chesky was bullish on the outlook and a change in the way people approach travel. Shares are down about 37% from the February peaks. Meanwhile shares in Disney declined 4% in the after-hours market as it missed on subscriber growth to its streaming service. Disney+ now has 103.6m subscribers; analysts had estimated 109m. The streaming service has been the big plus point over the last year as parks and cruises have been shuttered, so investors are disappointed that growth in this area is not as strong as they expected.

The dollar is a little on the defensive as the cooling in Treasury yields cools the heels of the bulls. Gold is higher, reclaiming the 38.2% retracement area. Higher interest rates tend to be bad for gold, but rising inflation is good, so the market is in a bit of a tussle to see where real rates are going. With the Fed still seen keeping its thumb firmly pressed on shorter-dated yields, rising inflation expectations would tend to support the bull case for gold. Looking ahead to today’s data, watch for US retail sales at 13:30 BST, expected at +1% on the headline reading and +0.5% for the core.