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US stocks made fresh record highs after the Fed’s preferred inflation gauge may have peaked at 3.4% and on improving expectations the economy will benefit from infrastructure spending in the fall.   The key inflation indicator for the Fed hit the highest levels since the early 1990s as the reopening of the economy was combined with the base effects of when everything shutdown last year.  The monthly PCE reading however declined and came in lower than economists’ forecasts.  Today’s inflation data was another vote of confidence for the inflation is transitory camp.

Investors are paid close attention to drops in income and spending that were greater-than-expected as the stimulus payments effect waned. The US economy is on sound footing and could keep sending stocks higher as the reopening momentum accelerates and hiring improves.

Infrastructure

Investors embraced the Biden administration’s tentative bipartisan infrastructure bill that still has an uncertain path forward.  The goal is to get it done by August recess, but end of September or early October is probably more realistic.  The $579 billion traditional infrastructure deal will deliver investments in road construction, fixing bridges, energy grid, and broadband internet, with no gas tax or undoing of the Trump tax cuts.  The human infrastructure bill which still has a ton of debate won’t be tied to the bipartisan bill.  Tax increases will eventually happen once the second bill gets negotiated.

Euro

The euro rallied after confidence data in Europe strongly improved as the gradual opening of the economy accelerated.  The GfK’s forward looking confidence indicator rose to -0.3, the highest level since August.  The recovery across Europe is still growing and that could remain the case as policymakers show signs to refrain from premature tightening.

Oil

Crude prices rallied on an improving demand outlook and over expectations the market will remain tight as OPEC+ is likely to only deliver a small boost to output at the July 1st ministerial meeting.  The energy markets are still optimistic that the delta-plus COVID-19 variant won’t derail the reopening momentum seen across Europe and Asia.  The crude demand outlook is getting hot as Americans embrace a travel intensive summer (cars, planes, and cruises), the global vaccination rollout is improving, and China’s crude stockpiles are at the lowest level since early February.

WTI crude will likely settle around the mid-$70s until energy traders have certainty over how much Iranian output will increase.  The seventh round of Iran nuclear talks still seem poised to get a deal done before the August 3rd Iranian inauguration day.

Gold

Gold prices pared gains Treasury yields pushed higher following an upwardly revised University of Michigan 12-month inflation expectations from 4.0% to 4.2%.  The consumer sentiment report was filled with unfavorable perception of market prices, rising income gains for the top income third, and concerns over high home, vehicle, and household durable pressures.

Gold initially rallied after the Fed’ preferred inflation gauge, the personal consumption expenditure index delivered a surprising softer print.  Gold will likely continue to stabilize going forward as the majority of Fed Chair Powell’s policymakers agree with him that inflation will be transitory.  The US economy will still see a healthy dose of stimulus over the next year and that should keep gold’s stimulus trade running strong.

Bitcoin

Bitcoin is settling closer to the bottom of its recent trading range as miners struggle to ramp up operations outside of China.  This is a necessary growing pain that will take time to work itself out.  Bitcoin’s longer-term bullish argument is intact but unless fresh endorsements are made on Wall Street, downside risks remain in place.

This commentary is kindly contributed by Edward Moya, Senior Market Analyst, The Americas, OANDA

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