While Jay and the Fed are persuaded
Inflation won’t soon be upgraded
The press keeps advising
That prices are rising
How long can rate hikes be evaded?
Chairman Powell gave yet another interview this weekend, this time to a national audience on 60 Minutes last night. A cynic might believe that the Chairman is concerned the Fed’s message, inflation is still quite low and will not present any problems, is not getting across to the general public. While those of us in the financial markets are well aware of everything he utters, his fame amongst the general populace is far less significant. (After all, I’m pretty certain he doesn’t have either an Instagram or TikTok presence!) The problem for the Fed if they are unable to get their message across is that people might start to believe
their own eyes what they read in the papers and lately, that is not synching well with the Fed’s message. The number of stories on inflation has been inflating along with a clearly growing interest by the general population, at least as evidenced by the number of Google searches on the subject. The fear here is that all of this talk of rising prices might result in a change in inflation expectations by the general population, and according to the Fed’s models, that is when inflation starts to rise.
The Fed is not the only central bank in this position as evidenced by comments this morning from Banca’d’Italia, and ECB Executive Board Member, Fabio Panetta’s comments, “We cannot be satisfied with inflation at 1.2% in 2022 and 1.4% in 2023.” Here, too, the concern is over too low inflation although, in fairness, the inflationary impulse on the Continent is far less consistent than in the US.
One need not look too deep beneath the surface to find a viable explanation for this lack of concern over rising prices. Clearly the ongoing need for central banks to continue to
monetize purchase government debt issuance in order to support the government in power economy is the catalyst. And there is no better rationale for a central bank to continue QE than a strong belief that inflation is too low along with a commitment to raise it.
That cynic might also question the timing of this 60 Minutes interview as it was aired just two days before the CPI data is to be released. We are all aware that CPI prints for the next several months will be quite a bit higher than the Fed’s 2.0% target as the base effects from the initial impacts of the Covid-inspired lockdowns are now the comparison. The month-on-month rate of CPI in March 2020 was -0.4% with it declining to -0.8% in April 2020. Given the very real increases in price pressures we have observed in the past months, you can be sure that CPI tomorrow, currently expected at 0.5% M/M, 2.5% Y/Y will be quite high. All told, Powell and the Fed will have to work overtime in order to ensure their message on inflation gets across, because if the general population starts to anticipate rising prices, even though the Fed ‘has tools’ to combat inflation, given the fragility of the economy, their ability to use those tools is highly suspect. Inflation, once it gets rolling, has a history of being more persistent than desired, and as much as the Fed claimed to fear deflation, I’m pretty sure they are not looking forward to having to fight inflation either. Especially as that would require actions that will slow the economy down, meaning they will be an easy political target for both sides of the aisle.
But CPI is tomorrow’s release, despite the fact that there are no less than ten stories on major media sites on the subject today. In the meantime, markets are starting the week generally on their back foot, with risk definitely under some pressure today. Equity markets in Asia, for instance, were all red (Nikkei -0.8%, Hang Seng -0.9%, Shanghai -1.1%) while European markets have been more mixed, but the mix is flat to down (DAX +0.1%, CAC 0.0%, FTSE 100 -0.4%). US futures markets are also pointing slightly lower, with all three major indices off by about 0.15% as I type.
Bond market activity has been fairly quiet, with the 10-year Treasury yield unchanged on the day, although we are seeing very modest gains (yield declines) in most of Europe (Bunds -1.3bps, OATs -1.5bps). Gilts are the lone exception here, with yields rising 1.0 basis point as the UK economy, despite a surprise spring snowstorm, welcomes the reopening of pubs for outdoor drinking/dining. As the UK economy reopens, there is a great deal of focus on the £150 billion of savings that have accrued during the lockdown and how much of that will be quickly spent. After all, that represents nearly 7% of GDP in the UK, and obviously, if spent would have a remarkable impact on growth there.
Commodity prices show oil rebounding from its recent lows (WTI +1.1%) as it pushes back to $60/bbl. Metals prices, however, have been far more mixed with precious largely unchanged, and base metals showing both gains and losses (Cu -0.4%, Al +0.2%).
Finally, the dollar is edging lower this morning in general, but by no means universally. G10 markets are led by GBP (+0.4%) on the economy reopening news and corresponding growth in confidence there, as well as JPY (+0.4%) which some will attribute to haven demand as equity markets suffered in Asia overnight, but I might attribute to Hideki Matsuyama’s fantastic win at the Masters yesterday. On the downside, SEK (-0.25%) is the weakest of the bunch, which looks more like position trading than fundamentally driven activity.
EMG currencies are also mixed this morning, but most of the movement remains modest at best. HUF (+0.6%) is the leading gainer followed by RUB (+0.3%) and PLN (+0.3%). The HUF seems to be rallying on the news that the central bank will be buying the soon to be issued government green bonds as part of their QE exercise, helping to add demand there. As to the other two, given the euro’s modest climb, it is no surprise to see EEMEA currencies rise. On the downside, it is all APAC currencies that fell last night, led by INR (-0.4%) and KRW (-0.35%), which were victims of local equity market disposals by international investors.
Data wise, there is important information beyond tomorrow’s CPI as follows:
|Today||Monthly Budget Statement||-$658B|
|Tuesday||CPI||0.5% (2.5% Y/Y)|
|-ex food & energy||0.2% (1.5% Y/Y)|
|Wednesday||Fed Beige Book|
So, there is much to learn this week, especially on Thursday, although if the CPI data is large enough, it is likely to dominate conversation for a while. The FOMC is back on tour this week with ten more speakers, including Chairman Powell on Wednesday, across at least 15 different venues. I expect there will be a great deal of effort downplaying any thoughts that inflation is making a permanent comeback and that current policy is perfect for right now.
In the end, though, the dollar remains beholden to the Treasury bond, as do most markets, and so all eyes will continue to be on its movement going forward. Strong data that pushes it to its recent high yield at 1.75% or beyond will result in the dollar rallying. On the other hand, if the data goes the other way, look for the dollar to retreat a bit further.
Good luck and stay safe