Nervously calm

Soft data eases inflation concerns

Inflationary fears continued to abate overnight, with the Philadelphia Fed Manufacturing Index retreating from near fifty-year highs to 31.5, much lower than expected. In Asia this morning, the data has been equally benign. South Korean PPI, MoM for April, fell to 0.60%, Australia’s Markit Composite Flash PMI for May fell to 58.10, led by services, while Preliminary Retail Sales MoM for April eased to 1.10%. Japan’s Inflation Rate MoM for April fell by -0.40%, more negative than expected. The Japan Jibun Bank Composite Flash PMI for May retreated to 48.10, a big undershoot. Services led the fall, but the manufacturing component also fell.

Covid-19 restrictions and fears in Japan and South Korea likely torpedoed the service components, and that may show up in pan-Asia data in the weeks ahead. EU PPIs were equally benign, and since the huge US Non-Farm miss in early May, there has been an undeniable trend of data suggesting that perhaps those inflation concerns are overdone.

That probably goes some way to explaining why the massive jump in this month’s US CPI did not result in US long-dated yields sustaining new highs for the year, and they have continued retreating gently, with no signs of buyer fatigue at the recent bond auctions. So it would appear that the buy-everything bulls are proving themselves correct at the moment. US yields fell overnight, even as equities rose and the US dollar resumed its retreat. The 7.0% fall in oil prices over the past week won’t help the inflation cause, and with a US/Iran deal seemingly in the offing, oil price fears will be put on the backburner for now.

Inflationista’s like myself will have to beat an orderly retreat for now, and with inflation fears ebbing, equity markets may resume rallying. I, for one, won’t miss the day-to-day, herd-like, mindless tail-chasing we have seen in equity markets and others over the past fortnight. For a start, it’s a nightmare to write about, especially when your modus operandi is to not look for a headline or data point to explain the noise of the day. I do not believe the inflation story is over, but I do accept it may be over for now. It shall return, but of one thing I am sure, we do not yet know if it will be transitory or sticky, for the first time in over 20 years. My gut feeling is the former, but I am open-minded enough to allow for the latter.

The crypto-space continues to grab the headlines and sure enough, the “get back in” mob has pushed bitcoin back above USD40,000 of US fiat backed by taxpayer revenues fiat currency. Bitcoin almost retraced in its entirety, the meltdown from USD44,000 at the start of the week, an impressive feat. Notably, it faded ahead of Wednesday’s opening price and the week’s high, and I suspect the hit to its credibility runs deeper than a low liquidity rally.

Given the frenzied reaction to the China story on Wednesday, which caught a nervous market very long and wrong, we should continue monitoring the wires for any crackdown-related comments. I say this because the new frontier of finances trade over the weekend, as rust, or bits, sleep for no man. Nerves remained heightened, and I cannot see liquidity being deeper on Saturdays and Sundays than Monday to Friday, especially after the last week. Weekend headline risk could prompt another bout of extended wealth destruction for the weekend warriors. One that even the get-back-in disciples may struggle to reconcile in their blockchain minds.

Asia has, understandably, taken a backwards look at this week and wisely decided that it’s Friday. Especially so with the data calendar now relatively quiet for the rest of the day. French, German, EU and US PMI’s later today may reinforce the not-so-inflationary story, as would a formal announcement of an agreement between the US and Iran. US Existing Home Sales could reinforce that sentiment, and Asia’s caution this week has served it well. As the adage goes, no one ever went broke taking a profit.

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