Most of the Chinese technology companies hit peaks in January/February, since then, among the better-known names, Baidu has fallen by more than 50%, Tencent Holdings and JD.com by around 40%. The US stock market was about the only one to remain positive over the period, though the Swiss market edged ahead, the UK and European markets all slipped back.

Bond markets exhibited a desire to look on the gloomy side as the latest iteration of COVID-19 continues its march and brought much talk of ‘peak’ growth. The further fall in US 10- and 30-year yields (to 1.25% and 1.9% respectively) is what can only be described as stark in the light of current inflation levels and ongoing warnings from companies as to the shortages (of raw materials, goods and staff) and the inflationary pressures that they face. Jerome Powell, governor of the US Federal Reserve, is due to speak this evening so we will learn more but the message from central banks remains that the inflation we are seeing is transitory. UK rates have followed a similar pattern with the 10-year gilt yield back down to 57bp.

We have seen some uncomfortably high readings for inflation on both sides of the Atlantic, and this looks likely to persist for a few months yet. As we have said on numerous occasions, a jump in the reported numbers was inevitable as we work through comparisons with 2020, when practically everything stopped. Indeed though, it would be odd if this chart of long-term inflation in the US did not cause a stir, see chart right.

The Bank of England, in common with the other major central banks, are explaining in soothing tones that this is a temporary blip in inflation and that it will subside again shortly. This may prove to be correct, but it will need to be seen to be right quite soon. Naturally it will subside to an extent as we get past the comparisons with last year but some aspects of inflation feel rather more persistent than transitory, which could easily start to impact inflation expectations, and so on to wage expectations. It could get tricky for the Central Banks to justify rock-bottom interest rates if this happens. We still expect the Fed to commence ‘tapering’ in Q4 but doubtless we will learn more of that this evening.

There is a tension here too with the figures for economic growth. The UK economy continues to recover with overall activity up to around 95% of pre-COVID levels, to quote Andrew Bailey, the Governor of the Bank of England, in a recent speech: “The good news is that the economy is only around 5% smaller than it was eighteen months ago”. The latest minutes of the Bank’s Monetary Policy Committee noted that growth has been stronger than they expected: “Since May, developments in global GDP growth have been somewhat stronger than anticipated, particularly in advanced economies” and “Bank staff have revised up their expectations for the level of UK GDP in 2021 Q2 by around 1½% since the May Report”.

The US economy is back to 100% of pre-COVID levels now and we expect growth there, along with the UK and Europe to continue to expand. There will come a time soon when the colossal monetary stimulus that we have seen, now accompanied by an equally large fiscal stimulus, is going to be hard to explain at a time of economic growth.