The plan that the Prez just released
Has taxes and spending increased
As well as what’s planned
There’s pent up demand
As such, disinflation’s deceased
Risk remains in vogue this morning as the details of the $2.3 trillion spending plan released last evening by President Biden were more than enough to keep the risk train rolling. While there was no mention of ‘shovel ready’ projects, and expectations are that it won’t be until sometime in the summer that any bill will make it to the president’s desk, it is full speed ahead for the investor community. Certainly, there are no concerns over either financing the new bill nor with the prospect that adding more stimulus demand is likely to drive up prices even more rapidly than currently seen. In other words, everything is great!
But is it really that great? It is hard to live in the real world and not have noticed that the cost of living is rising, and seemingly faster than the data indicates. By now, we have all heard about the shortage of microprocessors causing a reduction in auto production and even iPhones. I’m pretty sure that less supply in these products will not lead to lower prices. And if you still drive at all, you are aware of how much the price of gasoline has risen during the past year. But lately we have heard from a number of companies on more mundane products and how prices are being raised there as well. Kimberly-Clark, General Mills, J.M. Smucker and Hormel Foods have all announced price hikes in the past week or two, and they all make things we buy in the supermarket each week. So, while the rising price of a once every 3-6 year purchase of an automobile is not likely to impact any individual regularly, when your toilet paper goes up in price, you notice. The Fed must be thrilled.
In that vein, I often wonder how the Fed considers its relationship with inflation. Perhaps Powell rehearses discussions with an anthropomorphized version of inflation. Maybe it would sound like this:
Inflation: Jay, I have to tell you, I’m feeling pretty strong lately. I’ve been resting for the past 12 years and have a lot of energy available to jump pretty high.
Chairman Powell: That’s awfully nice, but let me warn you, ‘we have tools.’
Inflation: Tools? What does that even mean? Are you going to build a house? (Nah, too expensive with prices rising 10% annually). Repair the infrastructure? (That will certainly drive up raw material prices even further.)
Chairman Powell: Just what I said, we have tools. My dear friend Paul Volcker, may he rest in peace, taught us how to deal with you 40 years ago. We can stop you anytime we want.
Inflation: Well, 40 years ago, was a different time and place. The amount of outstanding debt was a fraction of where it is today. Since you haven’t used those ‘tools’ in 40 years, I suspect they are rusty and ineffective now. And even if you have them, I’m willing to bet you are either afraid to use them, or don’t know how. I’m looking forward to our next conversation when I will be bigger, stronger and higher!
Chairman Powell: Don’t mess with me, I told you, ‘we have tools!’
As Powell awakes shaking from this nightmare, he repeats to himself, we have tools, just like Christine has tools. It will all be fine.
But seriously, it is very difficult to see the ongoing data releases, especially in the US, where GDP is clearly going to see a very big jump in Q2 and analysts are fighting to forecast the biggest GDP growth number in decades, and not wonder how prices are not going to rise even more rapidly. In fact, we seem to be approaching a perfect storm, increased demand meets supply shortages. The Fed is going to get their inflation, as will most central banks, and it is ultimately going to have a big impact on financial markets. But not today. Today, investors continue to see only the positives.
After yesterday’s Tech led rally in the US stock markets, Asia performed well (Nikkei +0.7%, Hang Seng +2.0%, Shanghai +0.7%) and Europe is largely green as well (DAX +0.3%, CAC +0.2%, FTSE 100 +0.4%). As it is the first day of a new month and quarter, we saw PMI and Tankan data overnight, all of which continues to show positive vibes for the near future (although the Japanese data has been lagging that of the US and even Europe on these measures.) US futures, meanwhile, are also looking good with the NASDAQ (+0.9%) once again leading things higher with lesser gains in the other two main indices.
Bond markets, interestingly, are also in fine fettle this morning, with yields declining in Treasuries (-2.1bps), bunds (-1.2bps), OATs (-1.2bps) and Gilts (-2.1bps). But 10-year Treasury yields remain firmly above 1.7% and their spread to bunds and JGBs remain right at recent highs. It appears to me as though bond traders are taking a rest ahead of tomorrow’s payroll report, which will be released on Good Friday, a day of limited liquidity. If the economic bulls are right, and there is a print above 1 million jobs in NFP, I would expect that we will test 1.8% in the 10-year before the weekend arrives. However, until then, it looks like the growing short position in bonds is getting adjusted.
Oil prices are firmer this morning with WTI up by 1.1%, alongside gains in gold (+0.25%) and the agricultural space. Meanwhile, base metals are mixed with Cu (-0.65%) and Zn (-0.2%) softer while Al (+0.65%) and Ni (+0.8%) are firmer.
Lastly, the dollar is mixed today as well, with most of the G10 softer led by AUD (-0.4%) and CHF (-0.3%), although the euro has stopped its freefall, at least temporarily, and is currently 0.1% firmer on the session. Aussie seems to be slipping on the view that the RBA’s first QE plan, A$100 billion, is complete but that there will be a second one announced next Tuesday. The Swiss franc, on the other hand, seems to be developing some momentum on a technical view and is responding to market internals rather than fundamentals.
EMG currencies have had a much more mixed picture with both gainers and losers evident. On the plus side, TRY (+0.8%) and ZAR (+0.5%) lead the way higher, while we are seeing RUB (-0.6%) and CNY (-0.3%) as the key laggards. The rand seems to be benefitting from seasonal factors as technicians look at recent history when the ZAR has rallied consistently in April. TRY is simply so volatile these days given the ongoing mess at the central bank, that it is difficult to ascribe any move less than 2% to a specific issue. As to the negatives, RUB, despite oil’s gains, is suffering from news of a surprising new bond offering of RUB 1 trillion, while CNY seems to have been guided lower by the PBOC as the Chinese government has decided that a weaker currency is clearly going to be necessary to support their economy for now and the current US administration isn’t going to make a big deal about it.
Data this morning brings Initial Claims (exp 675K), Continuing Claims (3.75M) and ISM Manufacturing (61.5) and Prices Paid (85.0). FYI, that Prices Paid index is back at levels seen during the 50’s, 60’s and 70’s, all times when CPI inflation was far higher than 1.3%!
Frankly, with the payroll data tomorrow, I anticipate a generally quiet session, especially as much of Europe will be taking a long Easter holiday weekend starting quite soon. The dollar’s trend remains firmly higher, but I don’t expect much movement today.