US inflation data for May set to take centre stage this week

US inflation data for last month will be of special interest to the markets.
US inflation data for last month will be of special interest to the markets.PHOTO: REUTERS

SINGAPORE - Equity markets continued to grind northwards despite concerns about inflation and potential tightening of monetary policies by central banks.

Indeed amid signs of supply side constraints which could put pressure on prices, one of the most closely watched numbers has been unemployment. Thus it was not surprising that the United States job figures for last month became the centrepiece of market attention last week.

As it turned out, the job numbers came in below expectations despite being a significant improvement over April. Payrolls increased by 559,000 last month after a 278,000 gain in April. Economists were expecting a 675,000 rise last month.

The numbers pleased the market.

After falling sharply last Thursday, the Dow Jones rebounded last Friday, chalking up a 1 per cent weekly gain at 34,756.39.

The S&P index edged 0.6 per cent higher for the week at 4,229.89, while the tech-heavy Nasdaq was up 0.5 per cent during a volatile week to close at 13,814.89 last Friday.

However, the Straits Times index (STI) gave up 0.9 per cent to close at 3,151.04 as investors sold down banks and blue chips. DBS, OCBC and UOB declined by an average of 1.4 per cent last week. Still, the STI is up a respectable 13 per cent for first 22 weeks of this year.

Tomorrow will mark one year since Sembcorp Industries and Sembcorp Marine proposed the $2.1 billion recapitalisation of Sembmarine, and a demerger to focus companies on their growth segments. Since the end of May last year, Sembcorp Industries' share price has gained 218 per cent, while Sembmarine has fallen 54 per cent.

However, the past week has seen increased interest in Sembmarine, with trading volume remaining consistently high as it tries to definitively breach the 20 cents resistance level.

Going forward, the impact on prices of the US economic recovery will continue to be in focus. US inflation data for last month, set to be released on Thursday, will be of special interest to the markets after April's consumer price index (CPI) increase showed the largest monthly gain since 2009.

Last Friday's US job data showed that the long-term unemployed fell by 431,000 last month to 3.8 million people - accounting for 40.9 per cent of the total unemployed. That is a reduction from 43 per cent in April and 43.4 per cent in March.

Still, market experts like Mr Vasu Menon, executive director of investment strategy and wealth management at OCBC Bank, reckons the latest data could take some pressure off the Federal Reserve to tighten policy just yet.

"The May data eases concerns that the US labour market's recovery had stalled and that government policies such as extra unemployment benefits were keeping a large number of workers at home," he said. "However the recovery in employment may still be bumpy in the coming months as childcare obligations, enhanced jobless benefits and labour supply shortages impede hiring efforts and put upward pressure on wages."

The May employment data showed that US wages grew by a higher-than-expected 2 per cent year on year versus only 0.4 per cent in April.

But the Fed is unlikely to budge on its current policies just yet.

Currently near US$7.8 trillion (S$10.3 trillion), the Fed balance sheet could grow to US$9 trillion by the end of next year, according to projections released by the New York Fed.

Meanwhile, the favourable economic environment continues to favour riskier assets like equities, added Mr Menon.

In China, money supply and new yuan loans figures are due on Wednesday and it will be of interest to investors to assess the extent of credit tightening taking place in the country.

The European Central Bank, Russia and Canada all decide on interest rates this week.