Last week’s employment report enabled stocks to rally toward record highs, as new jobs created during the month of May amounted to 559,000 versus an expectation of 650,000. The unemployment rate also fell to 5.8% versus an expected 5.9%. The solid pickup in employment, while not overheating in terms of jobs or wages, provided a supportive environment for markets to rally. Additionally, it at least temporarily eased concerns about an overheating economy.
This week’s inflation data will likely be a bigger test. After April’s 0.8% increase, which was the largest since 2009, the expectation is for a 0.4% rise that would bring the year-over-year increase in inflation to 4.7%. The markets are concerned about inflationary pressures, as any longer-term uptick would erode the value of financial assets and put pressure on the Federal Reserve (Fed) to deduct monetary accommodation.
The consensus expectation is for the rise in inflation to be temporary, but the bond market will be cautious given the amount of stimulus in the economy. I expect peak inflation pressures to occur over the summer, but how quickly it returns to a level closer to the Fed’s 2% target will significantly impact asset prices toward the end of the year.
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