The uncertainty about inflation being transitory or otherwise remains unchanged even though several Fed officials attempted to quell fears yesterday. Investors are awaiting the publication of the US CPI inflation report for the month of April, due at 13:30 BST. This is expected to show a sizeable year-over-year rise to 3.6% from 2.6% previously. The comparison is being amplified due to the slump in data in the immediate aftermath of the Covid-19 shutdowns in 2020. Month-on-month, CPI is seen rising +0.2% while core CPI is expected to come in at +0.3%. What some investors fear is that CPI may already be overshooting expectations. If the April CPI does come in ahead of expectations, then it could exacerbate the ongoing inflation/tightening fears. So, although US futures have bounced noticeably off their overnight lows, the sellers could step in again should CPI beats expectations.
Ahead of the CPI report, the dollar had rebounded, and Treasury yields were steady, with equity indices all over the place. Could we see a break out for US 10-year bond yields from THIS bull flag pattern if inflation comes in hotter-than-expected?
Source: ThinkMarkets and TradingView.com
Worries over inflation is going to dominate market talk - and price action - in the months ahead as investors start to think about monetary policy tightening and focus less on the economic growth story, which you feel is perhaps already priced in with stocks and commodities surging higher in recent months.
Many fear that inflation could accelerate in the months ahead owing to the big gains for commodity prices this year and low interest rate, as well as pent up demand with many countries easing lockdown restrictions. To control inflation, the Fed and other central banks may have to raise borrowing costs sooner than they are planning. If inflation plays out this way, and all else being equally, this should mean higher bond yields, which, in turn, reduces the appeal of low-yielding and expensive stocks – and there are plenty of those on Wall Street, in particular the technology sector.
Strong UK data lifts pound and FTSE
Meanwhile, this morning’s release of stronger UK growth, manufacturing and construction data helped to lift the FTSE 0.5% after the index had dropped sharply in the previous session, along with the global markets. The pound also got a boost as it came off its earlier lows. However, with the focus being on US inflation today, investors were proceeding cautiously, and the GBP/USD stalled ahead of this week’s highs near 1.4150 area.
UK Prelim GDP:
- -1.5% q/q vs. -1.6% expected and +1.3% previous
- -6.1% y/y as expected and -7.3% last
- +2.1% m/m in March vs. +1.3% expected and +0.4% Feb
Other UK data highlights:
- Industrial production +1.8% m/m vs. +1.0% expected and +1.0% last
- Manufacturing production +2.1% vs. +1.0% expected and +1.3% last
- Construction output + 5.8% vs. +1.0% expected and 0.9% previous
Here’s what’s in store for the rest of the week:
Wednesday
- Central bank speech: Fed’s Clarida
- US CPI and core CPI
Thursday
- German, French and Swiss banks will be closed in observance of Ascension Day
- US unemployment claims and PPI measure of inflation
- Central bank speech: BoE Gov Baily and BOC Gov Macklem
- Earnings: Telefonica, BT Group, Burberry, Hargreaves Lansdown, and Airbnb and Walt Disney from the US
Friday
- US retail sales, industrial production and Prelim UoM’s Consumer Sentiment and Inflation Expectations indices
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