Inflation fears shrugged off

Markets ignore rise in US inflation

US inflation duly rose by 0.50% MoM for March overnight, roughly an eight-year high. However, the print was only just above expectations, and with markets ignoring the collapse of the China trade surplus earlier in the day, it was no surprise that Wall Street said: “nothing to see here, move along.”

It would have taken a much higher CPI print to shake market confidence, and the momentum of the US recovery, with the worst is over/buy everything momentum seemingly achieving escape velocity. Calls to suspend the Johnson & Johnson one-shot Covid-19 vaccine over the same blood-clotting issues dogging the AstraZeneca one was swept aside, admittedly because the US has ample stocks of Pfizer Biotech and Moderna to replace them.

Perhaps most importantly, the overnight US 30-year bond auction passed without incident with a healthy bid-to-cover ratio. With 3-year, 10-year and 30-year auctions all successfully concluding this week, the flame of a steeper yield curve has lessened markedly.

US yields retreated across the curve, and the impact on other assets was as predictable as it was mechanical. Equity markets rallied, notably technology, the US dollar fell, and precious metals and cryptos rallied. Oil markets also moved higher, helped along by OPEC, which raised its consumption outlook for 2021.

With markets ignoring higher inflation in the US, which is set to rise more in the months ahead, the street’s next inflection point is likely to be China’s Friday data dump. China releases Q1 GDP, Industrial Production and Retail Sales, but it would probably take a significant deviation to upset the applecart with the sentiment trumping data. In the meantime, the go-to strategy seems to be to ignore everything and buy everything.

The Monetary Authority of Singapore (MAS) held policy in neutral this morning as expected. It also left its GDP forecast between 4.0% and 6.0% unchanged as YoY Q1 GDP crawled back into positive territory at 0.20%. Electronic and specialised machinery exports are powering the rebound, as is an easing of social restrictions in the city-state.

Likewise, the Reserve Bank of New Zealand also their policy unchanged later this morning. As ever, the accompanying statement held the most interest for markets. It contained no surprises, highlighting the balanced risk profile even as the domestic recovery continues. Recent housing control measures, and vaccination programmes being thrown into disarray worldwide with the AstraZeneca hangover mean the RBNZ is under no pressure to hint at higher future rates. With risk appetite internationally running the show, any fallout on the New Zealand dollar should be non-existent.

India’s WPI Inflation YoY for March is released later today and may tough 6.0%. The Indian rupee remained under severe pressure and received only a modest US dollar weakness reprieve overnight. The RBI QE programme and India’s dire Covid-19 situation are subsuming any other factors. A 6.0% print will raise the stagflation nerves once again and is likely to be another headwind to the suffering currency, which may well test 76.00 versus the US dollar sooner rather than later.

The data calendar across Europe and the US is second-tier for the rest of the day. Still, we do have Federal Reserve Chairman Jerome Powell and at least four other Fed Governors speaking late this evening Asia time. Any one of them could provide some short-term volatility if they deviate from the Federal Reserve playbook, especially given the buy everything recovery hype that is sweeping markets like its 2020 this week.

Finally, I will be away from this afternoon for a short break on one of Indonesia’s sunny islands.  I shall return next Wednesday.

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