Peak Inflation Countries – MarketPulseMarketPulse

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Has US inflation peaked?

Equity markets outside China rallied today as US stock futures jumped in Asian trading. Overnight, US inflation hit multi-decade highs, with annual inflation at 8.50%, while core inflation rose to 6.50%. But the stock market’s perpetually bullish FOMO gnomes, desperate for more drinks to keep the party alive, found it in the MoM’s underlying inflation data for March. Core inflation exceeded forecasts, rising 0.30% vs. 0.50% expected.

That was all the stock markets needed, using the singular data point to gauge the spike in US inflation. Equity markets staged an impressive intraday rally and US yields eased somewhat over the longer term. However, Federal Reserve Chair Lael Brainard, the dove who unleashed the hawks last week, appeared on the wires still brandishing her talons over US monetary policy. This stopped the rally in its tracks, sending Wall Street to a slightly negative close.

Of course, it’s not just the United States that is struggling with inflation. India’s inflation returned to early pandemic highs, climbing to 6.95% yoy in March, while industrial production stagnated, rising to just 1.70% yoy in February. The Indian Rupee only eased slightly yesterday, however, and you could attribute that to a strong US Dollar overnight.

This morning my embarrassingly incompetent central bank, the Reserve Bank of New Zealand, did a dovish hawkishly rate hike. As expected (even if I am sometimes lucky), the RBNZ raised its key rate from 0.50% to 1.50%, while the market was expecting a rise of 0.25%. The RBNZ noted that it would advance monetary normalization to fight inflation. But tellingly, he left his final policy predictions for 2022 and 2023 unchanged. Thus, he plans to check in at the airport five hours before departure, instead of 2 hours before departure. NZD/USD jumped 0.50% when the decision was announced, but has since fallen 0.10% on the day to 0.6845.

New Zealand remains my most likely country, behind Russia, to experience an economic hard landing this year. Sri Lanka and Pakistan have already achieved this. For my fellow Kiwi readers of this newsletter, I sum up the state of New Zealand in this way. “The RBNZ and the government have commandeered and not consolidated the economy, I smell a RAT.”

So, what can we take away from all of the above? It looks like the market is swinging fast trying to price the “peak inflation”. The assumption is that yield curves in places like the US, Britain, Europe, Australia and New Zealand have already risen to such an extent that their respective central banks no longer do than “filling the gaps”. Markets, after all, are forward-looking and, in their wisdom, have already anticipated inflation and central bank responses.

Naturally, ‘spike inflation’ should be a reason to get back into equities, especially since with people’s microbial attention span these days thanks to our smartphones, we’re already seeing the fatigue/complacency of Ukraine settle. However, it’s just not that simple. In no particular order, the equity environment remains challenging. President Putin has declared negotiations with Ukraine an impasse. Both sides prepare for the second round of the war, this time in an open country. Russian oil production has fallen below 10 million barrels a day and OPEC shows no sign of moving to fill the void. Only a return of Iran and Venezuela could do that. China’s Covid-zero policy is an imminent threat to global growth. Ostensibly deflationary, a severe disruption of China’s port production chains and exports will be inflationary, not deflationary. The slow sinking of the Chinese real estate sector. An impending earnings season in the United States could highlight a reduced earnings outlook for many heavyweights.

Notably, the US Dollar has continued to rise overnight and US yields have failed to return significant gains recently. Oil prices are rising again and bitcoin shows no signs of recovery. The story seems to be that of the equity market, with other asset classes being much more cautious. Perhaps the most cautious rating is gold, which hit multi-week highs this week despite a much stronger US dollar and US yields. Either the gold market is entering a bullish trap – entirely plausible – or it is telling us something that the stock markets are ignoring.

The bottom line is that a monthly data point from the US is not a turning point. Certainly, Chinese equities do not think so.

Regarding China, its March trade balance has just been published. The overall figure in US dollars rose to $47.38 billion from the expected $22.4 billion. The headline, however, flatters a disturbing set of data. Exports outperformed, rising 14.70% in March. However, imports, instead of increasing by 8.0%, stagnated at -0.10%. The collapse in imports will intensify the noise around China’s slowing growth and its ramifications will rattle nerves in the rest of Asia. The data shows that international demand for Chinese products remains as robust as ever and that the massive Covid-zero shutdowns will lead to increased price pressures around the world. None of this trading data is particularly interesting to anyone today.

The UK today releases a series of data on inflation, core inflation, RPI and PPI. There are upside risks in all of this and higher than expected numbers will increase pressure on the Bank of England to accelerate the tightening. This could save the pound from a worrying technical break from the support at 1.3000 at the close. The US PPI will be of temporary interest if it is slightly below MoM. This can give equity bulls more ammunition. The Bank of Canada is expected to announce a 0.50% rate hike tonight as it plays catch-up. Finally, given the overnight rally in oil, official US crude inventories tonight should be good for volatility, especially if they pull back sharply.

This article is for general information purposes only. It is not investment advice or a solution for buying or selling securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for everyone. You could lose all your deposited funds.

With over 30 years of experience in the foreign exchange market – from spot/margin trading and NDFs to currency options and futures – Jeffrey Halley is OANDA’s Senior Market Analyst for Asia -Pacific, responsible for providing timely and relevant macroeconomic analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia, as well as prominent print publications including the New York Times and The Wall. Street newspaper, among others. He was born in New Zealand and holds an MBA from Cass Business School.

Jeffrey Halley
Jeffrey Halley

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