How will inflation impact recovery?

05/06/2021 | 09:37am

Fresh jobs data confirms that the economic recovery gained more momentum in recent weeks. Major U.S. indexes are all up this morning, at or close to all-time highs, fueled by good corporate earnings and economic indicators.

The Labor Department report showed fewer Americans filed new claims for unemployment benefits last week. Initial claims for state unemployment benefits reached 498,000 for the week ended May 1 compared to 590,000 for the previous week.

Commodities are soaring, which has investors wondering how the coming inflation will sit in the current environment of economic recovery.

Financial markets rebounded strongly yesterday, with the notable exception of the Nasdaq, which continued to move against the tide, weighed down by several very generously valued mid-sized companies that are less popular with investors. On both sides of the Atlantic, the most popular sectors were energy and basic materials, confirming the continued strong appetite for cyclicals and undervalued sectors. But there is still room to rebalance the large performance gap in favor of growth stocks that has been present for several years.

Over one year, increases in commodity markets range from 4% for gold, clearly the poor relation on this time step, to 347% for lumber. Oil and corn have more than doubled. Copper is not far behind. Cotton and sugar have risen 60% and wheat 50%. With figures like these, it's no wonder that doubt is creeping in about the trajectory of inflation, even if central banks remain impassive for the time being.

On a lighter note, Berkshire Hathaway shares are having trouble trading because they are too expensive. The Wall Street Journal reveals that the Nasdaq had to momentarily stop, yesterday, the diffusion of real time prices on several platforms because the price reached by the share - USD 424 840 at the bell - approaches the capacity limits of its computer system. The exchange operator's calculators are limited by the compact digital format they use to communicate prices. The WSJ explains that this limit is precisely $429,426.7295. However, Nasdaq should, by the end of the month, upgrade its systems to avoid the deadlock. It will get no help from Warren Buffett, who has no intention of having a split - a division of the nominal value - of the shares of his holding. Those who don't have $430,000 in their pockets can fall back on the holding company's B shares, which are offered at the more reasonable price of $282.76.

 

Economic highlights of the day

March retail sales in the euro zone, the Bank of England's decision on rates, and a series of U.S. statistics: Challenger survey on April layoffs, productivity and new weekly unemployment claims.

The dollar is back at EUR 0.8302. The ounce of gold is firm at USD 1793. Oil rebounds from the previous day's contraction to USD 68.59 per barrel of Brent and USD 65.17 per barrel of WTI. The yield on the US 10-year government bond is virtually unchanged at 1.58%. Bitcoin is losing some altitude at USD 58,000.

 

On markets:

* Uber Technologies narrowed its first-quarter losses but the stock is down 3.6 percent in pre-market trading as the chauffeured vehicle specialist announced a cut in its commission on rides to increase driver pay, which is expected to weigh on its second-quarter results.

* Paypal reported a strong first quarter on Wednesday, with earnings beating expectations thanks to consumers' shift to online shopping during the pandemic. The stock was up 4.5% in after-hours trading Wednesday.

* Tesla announced Thursday that it is developing a platform for owners of its electric vehicles in China that will allow them to access data generated by their cars.

* MetLife reported a better-than-expected first-quarter profit Wednesday as strong returns on investments cushioned the impact of coronavirus-related claims.

* Marathon Oil Group on Wednesday reported its first quarterly profit since the COVID-19 pandemic on the back of rebounding demand.

 

Analyst recommendations:

  • ArcelorMittal: JP Morgan advises its customers to buy the stock. The target price remains unchanged at EUR 29.50.
  • Bausch Health: RBC Capital has kept its Outperform rating and lowered its one year price target to USD 41, from USD 42.
  • CVS Health: Jefferies moves Price Target to $95 From $90, maintains Buy rating
  • Esperion Therapeutics: BTIG Research adjusts PT to $71 From $90, keeps Buy rating
  • HSBC Holdings: Goldman Sachs maintains its Buy rating on the stock. The target price continues to be set at GBp 555.
  • Hugo Boss: Jefferies remains in the hold category with its target price raised from EUR 32 to EUR 38.
  • ING Groep: UBS is Buy. The target price is still at EUR 11.50.
  • Logitech: UBS remains neutral with a price target raised to CHF 110 from CHF 108.
  • Lowe's: Wells Fargo lifts PT to $225 From $210, keeps Overweight rating
  • National Grid: Berenberg upgrades from Hold to Buy with a target of GBp 1100.
  • Pearson: Exane BNP Paribas upgrades from neutral to outperform with a target of GBP 950.
  • Reckitt Benckiser: Jefferies remains Hold with a price target raised to GBp 6050 from GBp 5950. 
  • Thomson Reuters: RBC Capital remains Outperform and raised its PT to USD 104, from USD 100
  • UBS Group: Goldman Sachs maintains his neutral opinion on the stock. The PT is being increased from CHF 16.20 to CHF 17.60.
  • AB Volvo: Goldman Sachs keeps its Buy rating. The price target is reviewed upwards from SEK 266 to SEK 274.
  • Zalando: Credit Suisse stays Neutral on the stock. The price is set at 100 versus 98 EUR.

 

Romain Fournier
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