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U.S. consumer price inflation (CPI) jumped 0.9 percent month-over-month in April (its biggest increase since September 1981) and three percent year-over-year (its biggest increase since December 1995).1 The surge has been driven mostly by sharp price increases of items in short supply. For example, used car prices increased 10 percent month-over-month, and this alone accounted for about one-third of April’s monthly inflation.2 Accordingly, rental car prices experienced the largest increase since 1975 as inventories were sold off during the pandemic.2
While most experts, including the Fed, believe this trend is transitory due to supply chain bottlenecks and an anniversary effect, high inflation is likely to persist for some time before supply can finally catch up with the demand being driven by the economy reopening.
Talk About Tapering
April’s Federal Open Market Committee (FOMC) meeting minutes suggested that “if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”3 On May 25, San Francisco Federal Reserve Bank President Mary Daly said during a media interview that, “we are talking about talking about tapering,” referring to the potential reduction of the Fed’s $120 billion in monthly asset purchases.4
While it’s by no means imminent, apparently the monetary policy transition from “not even thinking about raising interest rates” to “talking about talking about tapering” has quietly begun.
The Impact Of A Bitcoin Sell-Off
The price of bitcoin witnessed a sharp correction after Elon Musk tweeted that Tesla would no longer accept it as a form of payment for its electric vehicles given environmental concerns.5
The sell-off intensified as, barely a week later, China announced new crackdowns on bitcoin mining and reiterated its ban on financial institutions and payment companies providing cryptocurrency-related services.6 China’s crackdown on cryptocurrencies is not new. In 2013, the People’s Bank of China (PBOC) banned banks and payment companies from providing bitcoin-related services. Later in 2017, it shut down local cryptocurrency exchanges and blocked access to initial coin offerings (ICOs).7
The sudden spike in volatility and extreme price actions also put U.S. financial authorities and market regulators into action. The SEC cautioned investors about the risks associated with bitcoin futures used in some mutual funds. Given the market actions, we would expect the regulatory landscape to get tighter, especially considering the fact that a number of bitcoin ETFs are currently awaiting regulatory approval in the U.S.
An Increase In Green Assets
The energy transition is underway, and investors are fueling an increase in green assets. The prices of battery metals and companies associated with the transition have increased significantly over the last year. These are no longer niche investments, now held ubiquitously by mainstream fund managers.8
The performance hasn’t gone unnoticed as flows into ESG funds neared $180 billion globally during the first quarter of 2021. To meet the demand, there has been an average of two new ESG funds launched every day. As costs for clean-energy firms decrease, making these firms viable and attractive investments, demand is unlikely to decline. Although some of these companies are destined to fail, ESG assets will likely continue to increase going forward.8
A Tight Labor Market
As the economy continues to reopen, the tight labor market is placing additional strain on some companies. Job openings reached a record level of 8.1 million at the end of March 2021, and postings continued to rise in April, ending the month 24 percent higher than February 2020’s pre-pandemic level.9 However, the rate of available jobs as a share of all filled and unfilled positions was also a record at 5.3 percent in March.9
While there is no one variable that determines an individual’s willingness to work, many are pointing to the $300 federal unemployment benefit as an impediment to a stronger labor market. To that end, many states plan to end the federal benefit early, leaving an estimated 3.7 million individuals without it in mid-June.10 Furthermore, many baby boomers have elected to retire early rather than return to the workforce, further tightening the labor market.
These and other dynamics are contributing to labor shortages, which represents a risk to further economic recovery.
Crude Oil Prices Rising but Major Companies Are Turning Green
Crude oil prices have spiked more than 40 percent so far this year, with the price of gasoline about 50 percent higher than a year ago. We could see oil prices temporarily rise to $80 per barrel this summer.11
While high oil prices are mostly driven by surging demand as the global economy recovers from the pandemic, supply has been slow to catch up. Oil companies worldwide are facing significant resistance from stakeholders for new drilling and many of them are shifting their focus to renewable energy like solar and wind. This transformation was exemplified by the recent nomination of three “green-focused” board members to Exxon Mobil.12
Get our take on the potential shift to renewable energy on the PMC website.
If you’d like additional information about these trends or have questions, please contact PMC.Research@envestnet.com.
- Martin Baccardax, “April Core Inflation Rises At Fastest Pace Since 1981; Dow Features Tumble,” TheStreet.com, last modified on May 12, 2021, https://www.thestreet.com/investing/april-core-inflation-at-fastest-pace-since-1982-headline-4-2.
- Reade Pickert, “Cobalt price jump underscores reliance on metal for electric vehicle batteries,” Bloomberg.com, last modified on May 12, 2021, https://www.bloomberg.com/news/articles/2021-05-12/consumer-prices-in-u-s-increase-by-most-since-2009.
- Jeff Cox, “The Fed hinted it could reconsider easy policies if economy continues rapid improvement,” CNBC.com, las modified on May 19, 2021, https://www.cnbc.com/2021/05/19/fed-officials-said-rapid-progress-in-economy-could-lead-to-lowerng-asset-purchases.html.
- “Fed ‘talking about talking about’ tapering bond buying -Daly,” Reuters.com, last modified on May 25, 2021, https://www.reuters.com/article/us-usa-fed-daly/fed-talking-about-talking-about-tapering-bond-buying-daly-idUSKCN2D62LR.
- Lora Kolodny, “Elon Musk says Tesla will stop accepting bitcoin for car purchases, citing environmental concerns,” CNBC.com, last modified on May 12, 2021, https://www.cnbc.com/2021/05/12/elon-musk-says-tesla-will-stop-accepting-bitcoin-for-car-purchases.html.
- Jeff Cox, “Bitcoin price falls after China calls for crackdown on bitcoin mining and trading behavior,” CNBC.com, last modified on May 22, 2021, https://www.cnbc.com/2021/05/21/bitcoin-falls-after-china-calls-for-crackdown-on-bitcoin-mining-and-trading-behavior.html.
- “What Beijing’s new crackdown means for cryptocurrency in China,” EconomicTimes.IndiaTimes.com, last modified on May 19, 2021, https://economictimes.indiatimes.com/markets/cryptocurrency/what-beijings-new-crackdown-means-for-cryptocurrency-in-china/articleshow/82763142.cms?from=mdr.
- “A green bubble? We dissect the investment boom,” Economist.com, published on May 22, 2021, https://www.economist.com/finance-and-economics/2021/05/17/green-assets-are-on-a-wild-ride.
- Eric Morath, “U.S. Job Openings Reach Record as Hiring Slows,” WSJ.com, last modified on May 11, 2021, https://www.wsj.com/articles/job-openings-rise-despite-hiring-slowdown-11620725400.
- Greg Iacurci, “3.7 million Americans set to lose unemployment benefits early as 25 states exit federal programs,” CNBC.com, last modified on June 2, 2021, https://www.cnbc.com/2021/06/02/3point7-million-to-lose-unemployment-benefits-early-as-states-withdraw.html.
- Patti Domm, “It could be a hot summer ahead for oil prices,” CNBC.com, last modified on June 2, 2021, https://www.cnbc.com/2021/06/02/it-could-be-a-hot-summer-ahead-for-oil-prices.html.
- Clifford Krauss, “Exxon Board to Get a Third Activist Pushing Cleaner Energy,” NYTimes.com, published on June 2, 2021, https://www.nytimes.com/2021/06/02/business/exxon-board-clean-energy.html.
The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Past performance is not indicative of future results.