Analysis of today's markets

Enrique Marazuela, CFA CAd, director of investments at BBVA Private Banking.

1992 and the underlying inflation in the United States


Last week was marked by the publication of inflation data in the United States. The general CPI reached 5.0%, the highest since 2008. The underlying CPI, which breaks down the most volatile elements of the CPI in order to give a better sense of its trend, reached 3.8%, a figure not seen since... 1992! Now, you might have thought that the publication of these figures could have led to a widespread drop in prices for both bonds and stocks. Well, far from falling, they both saw moderate gains. 
On the pandemic front, we continue along the same line we've been seeing in previous weeks: significant progress in vaccination campaigns in developed countries and a moderate improvement in emerging countries with problems. We continue to believe that the pandemic will be eradicated, and sooner rather than later.
The last week, as we pointed out above, was characterized by inflation data in the United States, which reached levels not seen in a long time. This data in another context would have been devastating, but the transitory nature of some upswings, as well as the reassuring messages from the central banks, managed to keep the markets calm. In this regard, we note that last week there was a meeting of the European Central Bank's Governing Council, with its president announcing that the Bank was maintaining its expansive monetary stance.
On the growth front, we are continuing to see a recovery in the United States and Europe, but new this week is that we're seeing some areas where growth might have topped out, such as China. We're not worried about this situation in China: we prefer quality, and therefore sustainable, growth, to hasty growth, which may be unsustainable and that usually ends in sudden crises. That's why we shouldn't worry about seeing this situation come to pass in the United States too in the not-too-distant future. 
Despite the bad inflationary data, bonds continued on their somewhat counter-productive move, since their prices went up and their yields down, just the opposite of what happens when inflation spikes. The yield of the 10-year Bond, the American benchmark par excellence, fell to 1.45%. And the yield of the Bund, Germany's 10-year bond, which is the preeminent European benchmark for government bonds, saw its yield stabilize at -0.27%.
In equities, we saw moderate increases, which, speaking of surprises, surprise us less than the gains in bonds. And the reason for this is that bonds offer much less protection against a surge in inflation than stocks. The index we use as a global benchmark rose by 0.5% during the week, with no major contrasts between geographic areas. We did see a rotation in sectors, with those that are more sensitive to interest rates, whether positive or negative, advancing or pulling back, respectively. 
In the currency market, we saw the dollar recover from its weakness of recent weeks, trading at around 1.21 against the euro. 
Considering how there is nothing that leads us to think that a change in scenario is coming, we remain overweighted in stocks and underweighted in bonds; the recent drops in the yields of the latter, and their corresponding price increases, provide an excellent opportunity to reduce our bond holdings. 

In short, very bad inflation data out of the United States last week, although it didn't have the effect one might have expected on the markets, which saw advances in both fixed income and equities. We're sticking to our position.