Week in Review: June 11, 2021

In a week that seemed to lack any clear conviction, with the exception of US small caps, the S&P 500 managed to set two new record highs. Somewhat surprisingly, the records were set despite headline inflation rising to its highest level since 2008. Also surprising was the decline in bond yields, following the report’s release. One would be forgiven for assuming that a stronger-than-expected inflation report would lead to a selloff in the bond market and thus higher rates. Instead the opposite happened, as the 10-Year Treasury yield fell to its lowest level since March. Another interpretation of the decline in yields is that bond investors agree with the Fed that the current spike in inflation will be transitory and that once it subsides, economic activity will settle back to a longer-term run rate more consistent with what was experienced pre-pandemic.

For equity markets, it seems that the big question is “What’s next?” Given the market’s ho-hum reaction to a 50% increase in first quarter corporate earnings, it appears that investors have largely “priced in” the expected improvement in both corporate earnings and broader economic activity. The passage of an infrastructure bill might provide a marginal boost, but given the current state of negotiations, the final amount of any bill passed will be relatively modest in comparison to President Biden’s initial proposal of $2T.

Perhaps the largest near-term driver of markets will be monetary policy. While the Fed is widely expected to maintain its Fed Funds rate at current levels for the time being, increasingly there will be discussion about when the Fed might begin to slow the current pace of its asset purchases. How such pronouncements align with expectations will likely influence the near-term direction of markets.