Mixed, flattish start to trading for European stock markets after a record again on Wall Street as the S&P 500 closed above 4,700 for the first time. Gains of about 0.1% for the DAX and FTSE 100 keeping risk just in the green but the Stoxx 50 is flat. For US stocks it’s been a straight line up since the middle of October and whilst there is always this sense that ‘it must pull back soon’, that is sometimes when it’s finding the path of least resistance to the upside. Talking of which, Bitcoin has made a fresh all-time high and now could generate further upside now that resistance has been cleared. Read across to Coinbase, Microstrategy and other crypto stocks. Infrastructure stocks performed well as the market reacted to the passing of the $1tn infrastructure spending bill.

Risks are starting to take shape around rising covid cases in mainland Europe and the possibility of new lockdowns – something to watch in the coming days as it could play out with weakness for European equities. German infection rate at the highest since the pandemic started. Meanwhile the inflation threat looms as large as ever – tomorrow’s CPI numbers for the US will be closely assessed. Today we get the PPI numbers which are going to show ongoing supply chain pressure and pass through of costs to consumers, with the consensus at +0.6% for the headline number and +0.5% for the core PPI. Recent PMI surveys point in one direction for prices and that’s up.

On the whole inflation/rate hike theory…Yesterday, Fed mouthpiece Richard Clarida said conditions for rate rise likely to be met by end of 2022. Markets currently pricing for one by the middle of next year, so the Fed remains ‘behind the curve’. An alternative way to put this – as last week showed – is to say the market is ahead of itself.  

He also pointed out there is about $2tn in unspent free money accumulated during the pandemic that is yet to wash through the economy. Does that make inflation likely to be more or less transitory…? 

Yet more sticky signs: In August, Jay Powell noted that “if wage increases were to move materially and persistently above the levels of productivity gains and inflation, businesses would likely pass those increases on to customers, a process that could become the sort of ‘wage–price spiral’ seen at times in the past”. 

“Today we see little evidence of wage increases that might threaten excessive inflation,” he added. 

Well, the latest NY Fed median projected year ahead household income growth jumped to 3.3% in Oct from 3% in September. That’s just as productivity in the US plunged 5% in the third quarter to its lowest level in 40 years. Ok, so some of it is supply chain-related, but the picture is not the one that the Fed has been describing. Meanwhile, median one-year ahead inflation expectations rose 0.4% to 5.7% in October, reaching a new high for the survey launched in 2013. Clarida noted that the Fed had not anticipated the depth and breadth of the global supply shock. I guessed that but the question is – are you going to try to contain inflation expectations or not?

Charts: Sterling has found some near-term support and trying to now hold the 61.8/38.2% levels where there is clear near-term resistance to the bounce – eyes on the speeches of Bailey and Broadbent today.

Gold: real rates under pressure again with 10yr TIPS out to –1.11%, testing the first area of resistance at the 38.2% retracement around $1,827, with further resistance at $1,833, the Jul and Sep peaks. Breach to the upside here may call for $1,875. Persistently high inflation and a dovish/patient Fed is a good setup for the metal – the sharp fall real yields since last week’s meeting tells you that. Weaker dollar also a factor with DXY down under 94 again to test its 20-day SMA after once again failing to break out above 94.60 area last week, just as it failed in Sep and Oct.