Central banks paid a prominent role in determining the direction of European Equity markets in June 2021. First came a distinctively supportive meeting from the ECB where growth expectations for Eurozone GDP were upgraded from +4% to +4.6% accompanied by a commitment to increase emergency asset purchases at, according to Christine Lagarde, a “significantly higher pace” than previously suggested. This is despite inflation for May coming in above the bank’s targeted rate of just below 2%.
The fact that the ECB were not more hawkish on this inflation number strongly suggest they consider the price rises to be temporary thereby allaying one of the stock market’s greatest fears, that of run-away inflation. Unfortunately, the US Federal Reserve were not in such an accommodative mood going so far as suggesting rates would need to be raised at an earlier than expected date possibly as soon as 2022. This sent markets tumbling although some comforting words from Fed Chair Jerome Powell later in the month helped limit the fall out. These contradictory results from two central banks highlight the uncertainty of the situation concerning the inflationary outlook.
Evidence of price pressures is abundant not least in Europe where we are witnessing increasing supply chain bottlenecks giving suppliers the power to name their price in many instances. This of course is the result of the rapidity in which economies are reopening and the speed at which manufacturers need to replenish their inventories meaning the resultant inflation may well be transitory, which is the scenario clearly envisaged by the ECB.