Central banks of major advanced economies and emerging market countries have recently expressed completely different views on further near-term evolution of price growth - the former believe that high inflation won’t last long, while the latter apparently do not agree with this. The Mexican Central Bank unexpectedly joined the Russian and Brazilian Central Banks, which began their tightening cycle relatively aggressively. The bank surprised investors on Thursday by announcing a rate hike from 4% to 4.25% in response to inflation running above 6%, which failed to cool down despite expectations. None of the Bloomberg economists surveyed expected this decision.

The peso strengthened against USD and, together with other EM currencies, now looks like an attractive territory for investors, as following the “parade of speeches” by the Fed officials this week, one can say that the debate about tightening of credit conditions has been postponed at least until the conference in Jackson Hole in August. Growing policy divergence between the Fed and EM Central banks as well as low volatility are expected to be the key drivers of carry trade flows.

Dynamics of major EM currencies against the dollar since the beginning of the week

The S&P 500 set a new record of 4,270 points on Thursday as Biden seems to be making success in getting his infrastructure plan through Congress. News came in yesterday that he managed to reach agreement with a number of Republican senators. Curiously, the plan includes stimulus, however provides little detail about tax increases. Those sectors, which seem to be hanging over by strict regulation and the treat of increased taxes can apparently relax for now. The combination of the fiscal package and absence of imminent tax hikes sets the stage for a modest summer rally in risk assets, given a period of low volatility, in which strong downside moves are not common to see.

The final comment from the Fed this week came from Vice President Williams. Speaking on Thursday, the official chose to join his fellow hawks in stating that there is a risk of more upside in inflation and monetary policy must be prepared for it. Thus, he hinted that persistently high inflation readings will most likely force him to vote for reducing the pace of asset-purchases (QE) earlier than expected.

In opposition to Williams and other hawk officials, chairman Powell spoke. On Tuesday, he said that the fear of high inflation isn’t a sufficient condition to start raising rates. The initial market reaction to Powell comments was as if the Fed had extended low-rate guidance, but trading in the second half of the week indicated that the market would likely start pricing in monetary policy tightening if inflation in the US exceeds the reading in May (5% in CPI) over the next two months or will continue to accelerate.

Many market participants do not share Powell's opinion on inflation. For example, BoFA in its latest report expects inflation to remain elevated for two to four years, and only a collapse in the financial market could prevent Central Banks from raising rates.

The share of cash in portfolios of investors according to BoFa data is at 11.2%, which is well below the long-term averages. In the week ending Wednesday, investors bought $ 7bn in shares and $ 9.9bn in bonds, reducing investments in short-term money market instruments by $53.5bn.

In the second half of 2021, the key market topics, according to the BoFA, will be high inflation, the transition of global central banks to policy tightening and slowdown in economic growth.