Weekly Market Recap

Shelter me

19/07/2021

Week in review

U.S. CPI inflation surges to 5.4% y/y in June
China real GDP expands at 7.9% y/y in 2Q21
Australia’s unemployment rate drops to 4.9%

Week ahead

RBA minutes of July policy meeting
Australia retail sales for June
U.S. and Eurozone PMI’s for July

Thought of the week

The rate of inflation surged in June in the U.S. as supply disruptions saw used car prices spike, lifting the overall rate of inflation. This temporary force, along with others, are the ones that can be labelled transitory. The factors that can lead to more persistent levels of higher inflation are wages and shelter costs. Shelter accounts for a third of the U.S. CPI basket, making it an important contributor to the inflation outlook. Shelter costs and rents also move in bigger and stickier cycles than other services-related inflation components (see chart). Rents in the U.S. fell during the pandemic as many workers moved away from crowded cities or purchased their own homes as interest rates fell. However, with the impacts of the pandemic subsiding in the U.S., some of this is now starting to reverse. Costs associated with shelter, along with wage growth, are the forces that will determine whether the inflation rate in the U.S. settles in above the 2% pace after distortions have passed.

Shelter costs could drive longer term inflation

U.S. CPI inflation components, y/y

Source: BLS, FactSet, J.P. Morgan Asset Management. Data reflect most recently available as of 16/07/21.
All returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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