European stock markets rose in early trade Monday, with the DAX in Frankfurt hitting a new all-time high and the FTSE 100 making a fresh post-pandemic high above 7180 as the broadly positive mood in equity markets continued to override concerns about inflation. Travel shares like IAG and EasyJet fell as it appears all but certain England’s full reopening will be delayed by another 4 weeks. Markets are now caught between last week’s big inflation reading and this week’s Fed meeting. Despite the big inflation reading from the US, inflation expectations are not really rising which should allow the Fed to keep its dovish stance. Treasury yields have held under 1.5%, indicating investors are buying the transitory story for now. Nevertheless, I’d expect these to take offer at some point and for 10s to retest 2% in the coming months. 

Wednesday’s statement from the Federal Reserve is not expected to feature any fireworks, but it is an important meeting as it will offer clues about the reaction function of the central bank to rising inflation. We know the Fed is happy to let inflation run a little hot over the summer as it pins everything on its employment mandate. So, labour market data is arguably more important than inflation numbers right now. On that front the last NFP jobs report was something of a Goldilocks number – not too hot to worry about an early taper of the Fed’s $120bn-a-month bond buying programme, but not so cool as to fret about the recovery. The truth is the Fed is looking at both and this meeting comes at a time of great uncertainty over whether inflation will indeed prove to be as transitory as policymakers believe.  

Minutes from the FOMC meeting in April had the Fed floating a trial balloon, as these indicated some policymakers are thinking about thinking about tapering asset purchases. “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes said. Members of the FOMC also stressed the importance of “clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases”. The question remains: when does the Fed think it’s hit the landing area for the economy, and does inflation take off in the meantime? This week’s meeting is not expected to deliver any surprises – the jobs numbers are positive right now, but the labour market is some way off the Fed’s goal, whilst the inflation story is fairly-well understood for now. Anything to suggest the Fed could tighten earlier would lead to volatility. 

Meanwhile Bitcoin shot higher this weekend to trade close to $40k after Elon Musk indicated Tesla could accept the crypto asset for purchases. “When there’s confirmation of reasonable (~50%) clean energy usage by miners with positive future trend, Tesla will resume allowing Bitcoin transactions,” the ‘Technoking’ of Tesla tweeted. Tesla’s decision last month to stop accepting Bitcoin led to considerable volatility in the asset, whilst it was the company’s big investment announced in February that helped propel it to an all-time high near $65k. This latest tweet only confirms what a crazy relationship Musk has with Bitcoin and his incredible influence on prices. 

Oil prices made fresh highs as the outlook for demand improves and supplies remain on the tight side. WTI broke out clear of $71, its highest in almost 3 years. It comes after the International Energy Agency (IEA) called on OPEC and its allies to increase production. “OPEC+ needs to open the taps to keep the world oil markets adequately supplied,” it said last week.