Now that a sharp increase of inflation has become a reality, the next question is whether it is only a temporary spike or if this high inflation will sustain itself for a longer period of time and will affect economic growth. Is it the result of the economy reopening, increased demand and temporary supply shortages? Or could it transform into long-term inflation?

The Federal Reserve persists it is only temporary and kept the interest rate close to zero. The market did shortly dip however as the FED signaled that there could be two rate hikes in 2023. Previously they had stated that no interest rate increase would take place until at least the end of 2023. FED Chair Powell however relaxed the markets again by indicating that several rate hikes in 2023 are far from a certainty. At the same time Powell said the central bank hasn't made any decisions on ending its bond purchase program which it had in place to help prop up the economy through the pandemic.  

Meanwhile core inflation climbed from 1,6% in March to 3,0% in April, to 3,8% in May and now 4,5% in June, the highest level since 1991. Being above the target of 2% for three consecutive months already, it seems like a rather bold move by the FED to continue delaying interest rate increases. They even aknockledged that inflation could run hotter than the central bank expected. However, looking deeper into the numbers reveals that much of the price surge came from items such as commodities and airfares, as well as used cars, and is likely to be temporary. Also 10 year treasury yields dropped from 1,61 to 1,47 throughout June, indicating the market is relaxing its inflation concerns. 

As a result stock markets were mixed in June with the technology sector driving the gains after consolidating the previous month. The Dow Jones dropped 0,08% while the S&P500 and Nasdaq gained 3,93% and 5,49% respectively. The dollar also gained 3,03% against the Euro to 1,1855 USD/EUR. European indices performed more modestly with the Eurostoxx 50 gaining 0,61%, the German DAX 0,71% and the French CAC40 0,94%. After two very strong months of the Slovenian SBITOP, the index took a breather in June and dropped 1,46%. The British FTSE index increased by 0,21% with the Pound Sterling adding 0,34% against the Euro to 0,8571 GBP/EUR. The Japanese Nikkei index lost a modest 0,24% and Hang Seng Index lost 1,11%. 

Commodities were mixed in June with oil continuing its winning streak, adding 9,72% to 73,47 dollars per barrel, the highest level since October 2018. Precious metals on the other hand dropped, both on  dollar strength and on the anticipation that the hightened inflation is temporary. Gold and silver dropped by 7,3% and 7,09% respectively.

Rudy Marchant
Fund manager Primorski skladi d.o.o. Koper

Monthly reports - June 2021