It seems Wall Street investors have European Central Bank (ECB) President Christine Lagarde to thank for helping Wall Street shake off another hot inflation number on Thursday, closing sharply higher.
The annual inflation rate in the U.S. accelerated to 5% in May of 2021 from 4.2% in April, according to the U.S. Bureau of Labor Statistics. That's the highest number since August of 2008, and far ahead of market forecasts of 4.7%. Gasoline recorded the most significant increase, up 56.2%, followed by used cars and trucks (+29.7%), utility gas service (+13.5%), transportation services (+11.2%) and apparel (+5.6%).
The U.S.'s hot inflation numbers come a day after China reported a 9% jump in May wholesale prices, the fastest annual pace in over 12 years, adding to the fears that inflation is making a big comeback around the globe.
Rising inflation is usually a headwind for Wall Street. It pushes long-term interest rates higher, eventually forcing the Federal Reserve to raise short-term interest rates. Still, the Federal Reserve doesn't seem to be concerned about inflation risks. Fed Chairman Jerome Powell has repeatedly stated in public appearances that the recent surge in inflation is only a transitory problem due to supply-side bottlenecks as the economy strives to recover from the pandemic. He has also pointed that the U.S. economy has plenty of "slack," as measured by low capacity utilization numbers and high unemployment.
ECB President Christine Lagarde was on the same page with Chairman Powell on Thursday. Lagarde believes that inflation will remain tame in the Eurozone. The ECB will continue its 1.85 trillion Euro ($2.2 trillion) bond-buying program until March 2022 as part of its Pandemic Emergency Purchase Program (PEPP). This unity among central banking authorities helped reassure investors that allowing inflationary pressures to continue building is the correct course of action.
Credit markets seem to agree with central bankers, at least for the time being. The benchmark 10-year U.S. Treasury bond rallied on Thursday, with yields dropping to 1.46%. That helped major equity averages stage a big rally throughout the day.
At 4:00pm, the S&P 500 was at 4,239.10, up 0.47% for the day, while the Dow Jones was at 34,466.33, up 0.06%. The Nasdaq Composite was at 14,020, up 0.78% for the day as tech stocks gained momentum.
Disclosure: No positions