Inflation is what keeps investors up at night. Rising worries of seeing an overshoot in US inflation sent tech stocks lower at the beginning of this week. Nasdaq closed Monday’s session 2.55% down, while the S&P500 fell more than 1%.
And the latest Chinese figures didn’t help soothing investors’ nerves. The Chinese producer price inflation jumped to 6.8% y-o-y in April, although the consumer price inflation surprisingly eased below 1% during the same month. The rising factory-gate prices haven’t translated into higher end-product inflation in China, and this week’s data could confirm the same subdued reaction in US consumer prices, as well.
That suspense on the consumer price end is killing investors.
Commodity prices continue their race to the stars. So do the mining companies’ share prices in London. British mining stocks are surfing on the reflation wave, and they should continue outperforming their tech peers even with a stronger pound, as investors are increasingly ready to pay a higher premium in exchange of an efficient hedge against rising inflation.
What will happen to the tech stocks? Nothing dramatic, probably. We have a couple of tense hours in front of us, before the US inflation data due Wednesday. Then, we shall see a relief across the growth stocks, unless the data reveals an impressive jump in US consumer prices, which would match the surprise we’ve seen in US jobs data last Friday.
Inflation matters, but Fed’s policy matters more.
Inflation is important because the Federal Reserve (Fed) has an inflation goal above which it needs to tighten the financing conditions. And because the Fed’s ultra-supportive monetary policy is the main driver of equity prices, the market needs the liquidity to continue flowing in. Otherwise, with the overstretched valuations, a downside correction is, in theory, inevitable.
Nonetheless, inflation is not the number one driver of the Fed policy right now; the US jobs market is. Therefore, as long as inflation remains in line with the Fed’s target of an ‘average 2%’, the individual data is not an immediate threat to the market. And that’s the trick. Consumer inflation has just started picking up momentum and has way to go before becoming a material threat to the 2% average target.
More importantly, even if inflation surpasses the 3.6% expected by analysts, the Fed will continue playing down the durability of an eventual overshoot in inflation. So investors still have time before start worrying about a material, and durable rise in consumer price levels. And that will probably save the tech stocks.