Inflation is rising, but yields are sinking—and that bodes well for stocks

Good morning, Bull Sheeters, and happy Friday.

Firstly, a big thanks to Anne for taking the keys to Bull Sheet the past three days.

Speaking of keys…

U.S. futures are rebounding this morning after a sluggish overnight session. Investors are betting yesterday’s inflation reading ain’t worth stressing over. As such, the yield on a 10-year Treasury note fell to 1.436%, it’s lowest level in more than three months, fueling the risk-on mood.

Over in the crypto corner, Bitcoin is climbing. Ethereum and Dogecoin are down, but off their lows.

Let’s see what else is moving markets.

Markets update

Asia

• The major Asia indexes are mixed as they close out the week. The Hang Seng Composite, the best of the bunch, is up 0.4%.
• You can put away that “Mission Accomplished” banner. The 2021 global death toll from COVID-19—1.88 million—has already eclipsed last year’s awful tally, a new analysis by the Wall Street Journal points out, showing the ravages of the vaccine gap between rich and poor countries.
• One of this year’s buzziest IPOs will be Didi, the Chinese ride-hailing company backed by SoftBank, Uber and Tencent. In case you’re wondering, Didi didn’t yet hit break-even. Not even close. It just disclosed a whopping $1.6 billion loss for 2020.

Europe

• The European bourses were as flat as a pulled-pint of real English ale with the Stoxx Europe 600 up 0.2% in the first half-hour of trading, before climbing.
• Heads of state arrive on the Cornish coast today for the G7 Summit with COVID and climate on the agenda, plus fraying relations with China and Russia.
• In Britain, the G7 host country, the economy took off in April as shops re-opened, new data this morning reveals. That puts U.K. economic output at just 3.7% below pre-pandemic levels.

U.S.

• U.S. futures are flat this morning. The Nasdaq and S&P 500 are up for the week, with the latter closing at an all-time high yesterday.
• Shares in Tesla are off 0.4% in pre-market trading after CEO Elon Musk unveiled the company’s latest model, the “crazy fast” Model S Plaid. It goes zero to 60 in less than two seconds, and will cost you $130,000. How much is that in Bit—oh, never mind.
• A bipartisan group of Senators reached a deal last night on an infrastructure spending plan that, quite magically, would be funded with no new tax hikes. Price tag: $974 billion over five years, or $1.2 trillion if it gets extended to eight years.

Elsewhere

• Gold is up, trading above $1,900.
• The dollar is down.
• Crude is flat with Brent trading above $72/barrel.
• It’s Friday, which must mean…wait, Bitcoin is actually higher, trading above $37,000 at 5 a.m. ET.

***

By the numbers

5%

As my colleague, Anne, pointed out in yesterday’s newsletter, the i-word is driving markets indicators at the moment. The news that consumer prices climbed 5% in May puts core inflation at its highest level since 1991, according to Mickey Levy, chief U.S. economist for Americas and Asia at Berenberg Capital Markets. The headline number is hardly the story. Some of these price rises are, as they say, “transitory.” For example, food and medical care already shown signs of moderating. “On the other hand, inflation in durable goods is accelerating rapidly,” he writes. “Besides prices of motor vehicles, prices of apparel and home furnishings and operations are rising rapidly.” 

As David Taylor, CEO of  Procter & Gamble, told the Fortune Global Forum this week, inflation is “inevitable with what’s happened. We’ll see sequential increases. How much? I don’t know. What is clear is across many different input goods costs are up. And that’s going to have to be reflected over time throughout the economy.”

If there’s a silver lining, it’s that all this inflation-watching has taken our minds off, to some degree, the pandemic. According to a recent Goldman Sachs survey of investors, “COVID-19 data and vaccine rollouts are now a distant third (14%) in the lineup of most-watched events for the month, following U.S. economic data (38%) and central bank statements (34%). In other words, investors are back to their usual worries and becoming increasingly sensitive to any signs of tapering, just as they were the last time the Fed began to raise rates.”

Isn’t it a relief to know we’re once again stressing out on markets data?

-31%

It may feel as if everything—stocks, commodities, the price of a gallon of gas (that’s a liter of petrol, for those of us following along in metric)—is going up, up, up, but there is an important measure that’s drifting lower, lower, lower: the VIX. The so-called volatility index sits at 16.10 this morning, down 31% over the past six months. Remember: the lower the reading, the more likely investors are to see smooth sailing in the markets. More importantly, the daily movement on the VIX has been remarkably gradual. Nothing, it seems—not inflation, not spiking bond yields, not the rise of more virulent COVID-19 variants—can rock this boat.

1,919%

AMC Entertainment, the new king of the meme stocks, has had another up-and-down week. But it’s still up a whopping 1,900% in 2021. The loss-making cinema chain is doing more business every week, but it’s P/E is a horror show. The forecast is for AMC to achieve a price/earnings estimate of -13.25 this year, and -66.89 next year. To put that into perspective, the median P/E for an S&P 500 is firm is 14.85—positive 14.85—giving you an idea of just how out-of-whack expensive this stock is.

***

Postscript

A devoted Bull Sheet reader (my mom) called me the other day. Where have you been?, she wanted to know. Another reader emailed to ask if I was okay. A third texted me, are you ever coming back?

I’m back… Where was I?

I went up to Amandola, in the mountains northeast of Rome, to perform my virtual duties as co-chair of the Fortune Global Forum—emphasis on the global. As my my fellow chairperson, Lee Clifford, notes, the global forum participants hailed from 165 cities, six continents and employ more than 13 million people. What an event!

On Tuesday and Wednesday, we heard about the future of electrified flight, and the coming of Hyperloop travel (at 600 mph). We glimpsed the rise of green cities, the promise of cryptocurrencies in emerging economies and learned about Africa’s green economy. We also got a stark reminder about the truly frightening specter of ransomware that hangs over companies and governments.

It was such a gratifying and thought-provoking two days.

My neighbors in Amandola were totally hooked when I shared the highlights of the event. Our stone house sits in a quiet little hilltop hamlet between farms and pasturelands. But, centuries ago, Amandola was on the pilgrim path to Rome. All manners of people used to make the journey through these parts, bringing big ideas and bigger dreams with them. I could feel that can-do spirit loud and clear coming from this remarkable lineup of global forum speakers this week.

While I would have preferred to do the forum in-person (hopefully next year!), Amandola felt like a truly fitting locale to host such a virtual gathering. (And, if anybody from our events team is reading this, Amandola would be a great place to put on an in-person event, too. Hint, hint.)

That’s all to say, I’m back in Rome, and I’m feeling recharged.

***

Have a nice weekend, everyone. But first, there’s more news below.

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.

Today's reads

Not so minimum wage. Andrei Cherny, CEO of digital bank Aspiration hiked the minimum wage at the company to $25/hour, and he's already seeing the move pay dividends in reduced employee churn and what he hopes is a more engaged employee culture. “The costs of paying employees fairly can be substantial,” he writes. “The costs of failing to do so are even greater.”

The hottest commodity. Yes, I'm talking about lumber. Logging firms are racing to cut down Southern yellow pines to meet the bonkers market demand. But that's having little to no impact on lumber future contracts. Prices have softened in recent weeks, but they're still up 288% in the past 14 months.

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Market candy

Outlawing gas-guzzlers?

One of the more extreme of the green proposals on the G7 agenda this weekend is a pledge by the world's richest companies to push electric-powered cars over the carbon-spewing variety. According to Bloomberg, the idea is "to ensure that the majority of all new passenger car sales are not petrol or diesel-powered 'by 2030 or sooner.'" Alas, it's just a proposal, and has little chance of becoming an official measure. In any event, Tesla bulls are unmoved by the idea.