Your weekly economic update from the team at FXD Capital
US consumer prices continued accelerating, with data on Thursday showing their steepest year-on-year climb for nearly 13 years. According to Bureau of Labour Statistics data, May 2021 prices printed at 5% higher than a year ago, topping April’s seemingly heady (for the time) figure of 4.2%. The last time inflation was beyond the point we’re at now was in August 2008 when it hit 5.4%, and we all know what happened one month later.
As will be noted until the mid-summer 2021 period passes, these high inflation reports are almost to be expected. We are in an apple vs pear stage of comparing prices from a period of emergence/optimism against those from severe lockdowns of a year ago, which invariably throws up anomalies. Nevertheless, the attribution of the main drivers behind the US data shows an eclectic mix of sources, ranging from flight tickets, household furnishings and those notorious second-hand cars.
We shall see next week when the Federal Open Market Committee convenes whether it is sticking to its standard call of the rises being “transitory”.
When the taper tantrum began in March, yields and equity prices moved synchronously. Conditions are now more benign, with yields falling and stocks ebbing along. The US 10-year yield currently sits at 1.49%, a low not seen since before the tantrum began and almost 15% lower than the peak of 1.75% reached on March 30. The bond market is falling in line with the Fed’s wishes, and investors are coming around to the view that the status quo will remain. I believe this honeymoon will last until August when inflation indicators will shift past the mismatched annual comparisons, and proper indications come to light.
El Salvador voting to adopt Bitcoin as an official currency was exciting but not so revelatory. For countries that forgo issuing currency and circulate another’s hard tender (i.e. USD and EUR), there is a degree of surrogacy involved with not having sovereign monetary policy tools. Such restrictions would still exist with Bitcoin, albeit with less political risk attached to another nation. Perhaps the biggest fallacy about El Salvador’s hopes is that Bitcoin would assist remittances and financial inclusion, which for a digital asset is relatively expensive and clunky to send (average fees of ~$4.7), presenting a mismatch with the country’s needs.
China saw its producer price index rise 9% in May, following 6.8% of gains in April. Interestingly, consumer inflation (CPI) is only up 1.3% in May, from 0.9% in April. Chinese prices are rising but not being passed on to consumers.
BOE Chief Economist Andy Haldane commented on Wednesday that there were already “some pretty punchy pressures on prices”, which could prompt the central bank to rein in its massive stimulus programme at some point. While not particularly revelatory within the current context, he is about to leave his position at the end of the month, so his candour may be more direct than otherwise to be expected.
Haldane also directed his ire towards the “on fire” housing market, which has seen house prices rise 10% over the year. The perfect storm of factors: ample money printing, a year of saving, and low-interest rates are likely to fan the market’s flames further. Real assets, after all, are the best protection against inflation.
Commercial paper issuance has been ticking higher in the US. While prime banks are turning away deposits and money market funds are swamped with cash, international banks have been ramping up commercial paper programmes in the US to sweep up $460bn of cheap short-dated corporate cash, over a third of the entire market. With short term paper measured in days and weeks, the issuance deluge, at rates along the lines of 0.05%, is probably funding simple arbitrage – with funds immediately placed with the Fed at 0.1%.
The practice of market makers paying retail brokers for equity order flow is to be reviewed by the SEC. In theory, the approach allows retail investors access to “free” share dealing and smaller order sizes due to the subsidy effect, but has raised concerns about front-running and technical meltdowns that follow meme stock frenzies. Such a review is likely to be inconclusive but follows a similar theme to transparency efforts seen before in institutional markets, where pricing and fees need to be clearly defined and not cross-subsidised.
On Thursday, the ECB announced that it would maintain the pace of its €1.85 trillion bond purchase program over the coming months. It also raised forecasts for consumer prices from 1.5% to 1.9% and economic growth from 4.6% to 4.7%.
Some had been – rather optimistically – calling for the EU to start tapering stimulus measures. The EU has an attractive perch to observe others from: the US and UK are – to varying degrees – further along on the “reopening trade”, which will afford it time to see how prices and conditions pan out and what actions central banks make. Compared to the US, EU inflation sits at a parsimonious rate of 2%, so the bloc has some slack to sit on its hands for a period.
All the best for the week ahead,
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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