This week I’ve got another bunch of charts, all of which reinforce the dominant narrative is aggressive rebound. First off from Deutsche Bank this afternoon, the chart below shows money market funds versus S&P 500 market cap. All that cash is slowly being drained away into the stock market.

You could easily characterise this as cash flowing into a bubble but the reality is that earnings are surging. Even in Europe! Morgan Stanley European equity analysts have also been reporting today on record EPS beats across the continent. “ Initial strength in 1Q results has been maintained and we continue to see the best ever pace of EPS surprises on our data going back to 2007 [ my emphasis in bold]. 60% of companies have beaten EPS estimates by 5% or more, while 19% have missed, giving a strong ‘net beat’ of 41% of companies. Weighted earnings have so far come in 20% ahead of consensus with the median stock beating by 10% too. Financials and Consumer Discretionary have posted the broadest beats so far”.

This reflationary boost is also echoing in the commodity spectrum. The chart below comes form commodity analysts at SocGen. They observe that “the S&P GSCI (ER) rose by 8.23% in April, offsetting the 2.16% decline in March. The index finished the month at 222.04. Year to date, the index is up 22.88%. Except for livestock, which declined 2.32%, every sector was up in April, with the grains sector the best performer, rising 16.94%. Corn was best performing grain (and overall commodity), rising 22.4%, but Kansas and CBOT wheat were close, rising 20.6% and 18.4% respectively. The next best performing sector was the soft’s complex, rising 10.79% over the month, with sugar the outperformer, rising 14.9%. Base metals rose 9.67% in April, with copper the best performer, rising 11.8%. Precious metals also had a positive month, rising 3.29%. The energy sector rose 7.14% in April, with WTI and Brent rising 7.4% and 7.1% respectively, but natural gas was the best performer, rising 9.0% over the month.”

All of which prompts the inevitable question – what’s happening to inflation. Everyone is expecting some ‘normal’ price rebounds and thus short-term inflation. My own guess is that we could see a surge towards 3% in the UK and 2.5% in the US this year, perhaps even higher than that level. But I don’t think we are anywhere near a more stagflationary rebound with deeper structural challenges. That said, if labour costs starting rebounding more aggressively, then all bets will be off. On this score interesting to see Variant Perception warning that wages are rising sharply. You can see the longer article here :

VP’s leading US indicators are currently pointing towards “higher wage growth as employers pay up for better quality labour in the wake of the pandemic. A nascent rise in trade-union density suggests the wind is changing and that we may see more structural inflation risks coming from the labour market…Labour costs and rising wages are becoming a growing concern, with earnings rising in many countries across the world. The pandemic and the policy responses to it – including direct fiscal support for earnings – have led to the dynamic of wages continuing to be biased higher, even while in many cases unemployment rates remain well above their pre-pandemic levels.

Leading indicators for US wages agree. The rising Quit Rate suggests workers are confident enough of finding a new role if they quit, and this often leads to rising wages.”

I think the juries still very much out about a more systemic inflationary surge but I do think that the developed world stock markets will be watching these wage numbers like a hawk. Their concern will be that central banks start to turn off the tap and start selling bonds from their portfolios.