Perspectives : July 2021 : Yield curve
Yield curve VS inflation
- Equity markets continue to turn price declines into new opportunities quickly, the COVID-19 Delta variant scare has generated uncertainty and volatility during the month of July.
- The Q2 corporate earnings reporting season got off to a strong start, with about 89% of companies beating analysts' expectations. Alphabet, Apple and Microsoft alone generated USD 57 billion in net earnings in the quarter.
- In a major sign of investor caution, the U.S. 10-year Treasury bond has fallen 20 Bps, from 1.48 to 1.27 during the month.
Macro corner | Yield curve
July has been another positive month for equity markets. They have managed to close for the sixth consecutive month in positive territory (S&P 500 and Euro Stoxx 50). Market behavior was dominated by the fear of the Delta variant, which was largely mitigated by solid economic data and extremely strong corporate earnings reports. However, it cannot be ignored that the number of cases has risen considerably. In the U.S., it went from a daily average of 14,000 cases in June to over 60,000 by the end of July.
What is remarkable about the increase in the number of cases is that the new infections have not been reflected in high levels of deaths on average. In fact, the number of fatalities has declined during this period, demonstrating the efficacy of the vaccines. However, this is an important fact to review; since half of the American population has not yet been vaccinated and a complex situation could arise if this does not improve.
So far, the authorities of the different states and companies have not defined what decision to take regarding the return to work. However, the CDC (Centers for Disease Control and Prevention) announced that the use of facemasks in enclosed spaces is recommended.
Read more | Yield curve
On the topic of inflation, elevated levels of inflation were observed in multiple measures. The PPI (Producer Price Index) rose 7.3% compared to June 2020. CPI (Consumer Price Index), the most common metric used, was up 5.3% compared to the same period in 2020. This data represents the highest measures since 2008. However, Jerome Powell, Joe Biden and even Christine Lagarde of the ECB insist that inflation is transitory. The reality is that we will not know if inflation is actually very high for several months. For now, financial markets are showing full confidence in Powell and the FED.
The confidence that the situation is under control is not only reflected in financial market prices, but also in some external indices. We highlight the Consumer Confidence Index, created by the Conference Board, which rose for the sixth consecutive month to stand very close to pre-pandemic levels.
Closing the month of July, equity markets were hit by actions taken by Chinese regulators who cracked down on a number of major technology companies. Some market favorites such as Meituan, Tencent and Alibaba fell between 20% and 30% in a very short period of time. Aggressiveness on the part of the regulator and uncertainty about which companies would be safe brought down the region.
