Asia drifts in post-holiday doldrums

With US markets closed overnight, Asian markets are drifting today. Equities are mixed with currency markets are indulging in some modest US dollar short-covering as US bond futures fall (yields up). Gold and silver remain comatose. Only oil is on the move, continuing its rally overnight as Shanghai eases more restrictions and the European Union announces a partial Russian oil ban.

ECB to hike in July

Overnight, German inflation soared to 7.90%, with the HCIP for May leaping to 8.70%. Both numbers were well above forecast, sparking a sell-off in European government bonds. The ECB’s Lagarde and Lane also signalled a July lift-off for rate hikes and an end to quantitative easing. Some are already talking about the ECB hiking by 0.50% in July now, these are strange times we live in. ​ Although the euro got a brief lift from the inflation data and ECB comments, it stalled ahead of 1.0800 as European growth fears ratcheted higher.

The data in Asia today has been a mixed picture. South Korean Industrial and Construction Production held steady for April, but Retail Sales eased to just 0.50% YoY for April as the cost of living increased and Bank of Korea hikes start to bite. The Australian Current Account fell to AUD 7.50 billion for Q1, old news by now, but Private Sector Credit and Business Inventories for April remained steady. Japan’s Retail Sales for April YoY surged to 2.90% thanks to a reopening boom in consumption, it probably won’t last. Meanwhile, Industrial Production in April MoM fell by 1.30%, with China’s covid zero restrictions making their presence felt. ​ All-in-all, it suggested that Asia-Pacific ex-China continues to keep its head above water, but with no chance of breaking the 50-metre crawl record.

Most importantly, China’s Manufacturing and Non-Manufacturing PMIs showed some signs of life after the shocking April numbers. May Manufacturing PMI rose 49.6, with Services PMI recovering to 47.8. Both numbers remain below 50.0 and are thus in contractionary territory. But are markedly less so thanks to an easing of restrictions in Beijing and Shanghai. A less worse than expected set of data has prompted a modest rally in China equities today, holding the promise of an accelerating recovery in June if the virus situation remains benign. That’s a big if.

This afternoon, it is France and Italy’s turn to release May Inflation and although neither is likely to reach German levels, both have upside risks now. Eurozone Inflation, though, is set to rise to 7.70% YoY for May with upside risks as well. With the partial EU ban on Russian oil imports now in the home straight, inflation nerves will be even tauter, especially after the ECB comments on monetary policy overnight. Expect another European bond sell-off if the inflation prints come in above forecasts. That will be a mixed blessing once again for the euro, although I suspect growth fears will continue capping the topside.

The inflationary pressures and the accompanying noise around recessions as central bank’s hands are forced, are slowly permeating their way out of what I call the Anglo-Saxon world, and into Europe and Asia. Europe’s position is more complicated as it is effectively moving into a wartime economy for some time to come. That is going to complicate the growth picture everywhere and give the bottom fishers of the equity and bond markets pause for thought. Inflation is a new concept for anyone who started working in financial markets in the last 20 years, and this time, the world’s central banks won’t be able to cut rates or open the QE tap. Some may describe the end of the artificial 15-year edifice constructed by global monetary policy to steal the wealth of our children, NPV-ing it to the present day to keep the party going, as a disaster, I call it an economic cycle. Welcome back, you have been missed.

One last word for FOMO bottom-fishers, Brent crude is above USD 122.00 a barrel and Europe is enacting a Russian oil ban. The Fed starts quantitative tightening this week. Just saying this on behalf of a friend.

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