Credit Suisse says markets 'consolidating' not 'correcting'
Stockmarkets are set to consolidate, given that inflation is now "a bit more" of an issue, but they are not headed for a 'correction', says Andrew Garthwaite at Credit Suisse.
In a research note sent to clients Garthwaite added that there was still "a bit more of a near-term hit to come", with the so-called output gap in the US economy potentially set to close by the third quarter of 2021.
Indeed, he believed the American economy might grow by 8.0-9.0% in 2021, versus economists' forecasts for an expansion of 6.3%.
Yet while surveys were pointing towards a rise in the year-on-year core CPI inflation to 3.2% - against 3.0% currently -
Significantly, he also expected the Federal Reserve to keep policy "loose" until inflation breakevens on 10-year Treasuries broke above 3.0%.
Perhaps the trickiest bit for the Fed, he said, would be to prove that wage inflation was transitory - until September.
"Nearly 60% of cost comes from the labour market (more so for services)," he said.
"Near term, there is evidence of rising wage growth (looking at NFIB survey or wage data) with jobs hard to fill near record highs, and it will be difficult to prove that this rise in wage growth is temporary (i.e. that shortages were caused by workers being paid to stay at home) until the additional unemployment benefits of $300/week run out in September."
Other inflationary factors at play included M2 money supply growth running at 24%, less globalisation, commodity prices, demographics and the need for negative real interest rates in order to delever.
The upshot from rising inflation expectations, Garthwaite argued in a research note sent to clients, was that they were typically "positive" for cyclicals - especially banks - value stocks and small caps.
Besides Financials, on which it remained 'overweight', Garthwaite's strategy team also "particularly" liked firms with informal links to consumer price inflation.
Those included BT Group, National Grid, Fidelity National Information Services, Capital Health, CK Infrastructure, and Power Asset Holdings.