The S&P 500 Index reached a record high and US 10-year yields fell last week despite the fastest rise in core US CPI since 1992. The details of the data and the market reaction support UBS’s view that the Federal Reserve will look through transitory inflation and focus on the labor market. Against this backdrop, the bank sees further upside for equities.
The market appears to be taking the Fed at its word
“The data support the Fed’s view that inflation is not broad-based and is likely transitory. The impact of low base effects, such as energy prices, will ease in the coming months. By the end of the year, even if Brent rises to our forecast of $75/bbl, the direct influence of oil prices on US consumer price inflation will almost halve.”
“As enhanced unemployment benefits are withdrawn, schools reopen after the summer, and vaccinations increase the confidence of older workers to rejoin the labor force, we believe payrolls will increase more rapidly, but this will not be for several months.”
“We share the Fed’s view that the rise in inflation will be transitory. We expect US 10-year yields to resume their rise as the economy fully reopens and payroll growth picks up, and we have an end-year forecast of 2%.”
“We see further upside for equities, and think cyclical areas of the market, like energy and financials, should outperform.”
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