Inflation is the dominant topic across markets

Market participants are clearly focused on inflation concerns, which are taking shape in rising commodity prices, fiscal stimulus worth billions and, despite these efforts, a persistently low interest rate level.

The discussions were fuelled by April data from the US, published on Wednesday and Thursday of this week. The consumer price index rose by 4.2 per cent compared to the same month last year, the largest increase since 2008. The producer price index climbed as much as 6.2 per cent, the strongest northward movement since September 2011. Some of the price increases are attributable to the fact that energy prices bottomed out in April 2020, which in turn means that the baseline for year-on-year comparisons is extremely low. However, the respective core rates, which exclude energy and food prices, also went significantly above the forecast levels, by 3.0 and 4.1 per cent, respectively. This development is likely to deepen the fears of market participants averse to rising inflation rates.

Inflation rate spike only temporary?

The markets are asking one crucial question: are the extreme price developments only temporary or should we expect persistent, unusually high inflation rates? Both the Fed and the ECB continue to express their expectation that the inflation rate rise is temporary and will come to an end towards the end of the year. We will have to wait and see.

The markets are divided on the issue. Following the publication of US consumer price data, yields on long-term government bonds rose quite sharply, and not only in the US. Yields on ten-year German federal bonds temporarily reached a two-year high of -0.096 per cent. Their Italian counterparts yielded 1.055 per cent, the highest level in eight months. As yields also rose within the eurozone, US dollar performance remained limited.

Gold price almost unchanged

The gold price is currently caught between rising inflation expectations, which tend to be supportive, and headwind in the shape of potentially rising capital market interest rates.

As a consequence, the gold price did not see dramatic changes over the course of the week, rising from 1,820 US$ per ounce last Friday morning to 1,845 on Monday afternoon. With capital market interest rates climbing in the US, the gold price had dropped to 1,809 by midday yesterday. As yields eased, gold regained its strength and traded at 1,828 US$ per ounce this morning.

The price of Xetra-Gold price also rose slightly; within regular trading hours, it initially climbed from 48.50 € per gram last Friday to a weekly high of 48.80, but retreated to 48.10 due to the firmer euro. At the opening of trading today, Xetra-Gold traded around 48.60 € per gram.

Today, the markets are looking to the US for the publication of retail sales data, and many investors are also keeping an eye on commodities such as iron ore, which saw significant price losses this morning, and copper, for any indications of possible inflationary pressures.

I wish all readers a relaxing weekend.