Inflation fears persist
The noise level has risen to eardrum-bursting levels across the financial market space, with currencies, energy and precious metals having volatile intra-day sessions, but finishing near unchanged as the dust settled. The source of the market’s angst is inflation, and whether it is transitory or here to stay. In all honesty, I was in the transitory camp, but I am wavering, with the US NFIB Survey overnight firing on all cylinders, notably the employment and compensation sub-indexes. JOLTs Job Openings for March rose to 8.1 million, although a March number seems a bit backwards-looking into today’s dynamic markets.
A procession of Federal Reserve speakers stayed on message overnight, but that didn’t seem to soothe nerves either. China’s PPI yesterday, along with the rise in base metal commodity prices, probably isn’t helping the transitory inflation cause either with the world nowhere near remotely in a post-Covid phase, only those parts that managed to buy all the vaccines first.
Interestingly, the ostensibly anti-inflation Non-Farm Payrolls miss last Friday has quickly been forgotten as a one-off, with inflation nerves quickly reasserting themselves. That speaks volumes as to the direction of travel for financial markets right now, and it isn’t lower inflation.
What is bemusing is the price action in certain asset classes and the wild pivoting of narrative as commentators desperately try to explain the price action. The Dow Jones fell heavily overnight while the Nasdaq held steady, an opposite and equal reaction from the session before. Inflation was blamed for the moves last night, but also blamed for Monday’s moves. The Nasdaq still looks in trouble, I might add.
Similarly, the US dollar fell slightly overnight, having retreated and rallied intraday. It was saved by US yields rising overnight, but the dollar index still finished ever so slightly lower. Inflation and dollar debasement was wheelbarrowed out to explain away the headline fall, but actually, it was inflation expectations firming up the US yield curve that lifted the dollar of its lows.
Gold, rather intriguingly, fell by nearly 20 dollars an ounce intra-day as US yields firmed, only to recover all of those losses by the session’s end. An opposite reaction to what we have come to expect from the last few months. Rising yields and US dollars normally equal weaker gold. Could it be that yesterday marked the return of gold’s inflation-hedging mojo? If so, then the direction of financial markets is absolutely towards higher inflation, which may, or may not, be transitory.
If all of this so far has left your head spinning and wanting to put a cold towel on it, then my work here is done. Desperately looking for nebulous themes, supported by even more nebulous logic, to explain irrational market moves is a classic reaction to a mature directional move. Similarly, tail-chasing back and forth price action across asset classes is a similar symptom. That volatility has been amplified by the vast increase in retail investor participation in equity markets since the start of the pandemic. That segment of the financial world has yet to deal with the concept of an extended retreat in the value of their portfolios.
So, to help readers turn down the noise, I am seeing the world as thus. The dismissal of the Non-Farm Payrolls miss last week suggests that the direction of travel for the markets is rapidly rising inflation and fears it could be “sticky” as the global recovery accelerates. Having been missing in action for 30 years, the return of inflation and its impact on asset classes will be a new concept for most of us (I still remember it vaguely).
We are over one year into the mother of all buy-everything rallies across asset classes, as a savings glut and central bank free money send asset prices flying in the hunt for a yield anywhere above zero per cent. A correction had to come at some stage, and the inflation genie might be the catalyst.
An above-expectations US CPI print this evening and/or weak 10-year and 30-year US bond auctions tonight and tomorrow, could release that genie from the bottle. The buy-everything trade may become a sell-everything trade for a while. In such circumstance, central banks are even less likely to mention the “T” word, and after a time, thanks to that ocean of money looking for a home, it will become the buy-the-dip-on-everything trade.
In Asia-Pacific, Australia’s federal budget was announced today. Although spending will increase, ostensibly to boost employment, it was not a giveaway budget. It also missed the mark on a few fronts—notably childcare provisions to help women re-enter the workforce. All in all, it was market neutral, although Australian 10-year bond yields moved higher. It certainly won’t raise fears that the central bank will need to counteract the effects of a fiscal pump by tightening liquidity.
South Korean unemployment fell once again, to 3.70%. Hinting that the recovery there is becoming more balanced between the domestic and export-facing sectors of the economy. Australian Building Permits rose 17.40%, another strong data point in a procession of such from the lucky country. Less so was Qantas cancelling its international schedule later this year after the federal budget announcements also suggested the country’s borders would be closed until mid-2022. Given Australia’s quarantine capacity limitations, that should have surprised precisely nobody.
The Asian calendar is quiet until India releases March Industrial Production and April Inflation late this evening at 2000SGT. The pandemic will weigh on inflation while Industrial Production will show a pre-third-wave rebound on a YoY basis. Unless inflation surprises to the upside, negative for the rupee, the data should be roughly neutral.
We receive a slew of pan-Europe Inflation data later today before the week’s main event, US Inflation and Core Inflation for April. Risks are for European inflation also to rise more than expected. If that is followed by a steep rise in the US data, equity and bond markets could be in for a torrid evening.