Inflation woes continue

Can stocks maintain their resilience?

The week is ending a little flat, with equity markets not far from their opening levels, rather in keeping with the mood in equities throughout.

It’s impossible not to look at everything this week through the lens of inflation, most notably in the US. In many ways, stock markets have performed remarkably against the backdrop of high inflation and higher rates to come. Central banks and low inflation have been a backstop for years, the next year is going to look very different.

Stocks have been on a strong run thanks to a knockout earnings season but with that winding down, investors will have to look elsewhere for positive catalysts. The economic data may offer some cause for optimism, like last weeks jobs report, but even that comes at a cost. Still, better than stagflation.

The data on the labour market in the US continues to point to the same issues which will only stoke further inflationary pressures. Plenty of openings, not enough people to fill them. JOLTS job openings fell to 10.44 million last week, above expectations and near its highs. A good problem to have, no doubt, but a problem nonetheless.  Higher participation in the coming months may help but another red flag for the Fed in the interim.

Inflation expectations also ticked higher again last month to 4.9% which is another concern for the Fed, with the current levels not seen since 2008. Whether that will translate through to higher wage pressures and more prolonged inflation isn’t clear. But again, it will make the Fed very uncomfortable.

Bitcoin struggling near its highs

Bitcoin is edging lower at the end of the week after failing to hold onto new highs on Wednesday following the US inflation report. The spike in bitcoin alongside a similar rally in gold after the release gave the impression that both were benefiting from inflation hedge flows but the cryptocurrency quickly gave back those gains and has struggled to recover since.

Whether that’s a sign of the market not fully believing it as a hedge, a sign of an overbought market, or something else, it’s not particularly bullish and may signal and correction. Of course, I’ve said this before at times when everything is pointing towards that and it’s dug deep, protected support levels and rallied once more.

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