Will the hot US inflation data disrupt the markets?

US government bonds rallied on Friday after a weaker-than-expected reading of US employment growth for May. But a key report on consumer price inflation will be a new test for investors.

Consumer prices rose at their fastest pace in more than a decade in the 12 months leading up to April, but analysts predict they have risen further since then, raising fears that the economy is overheating.

Economists polled by Bloomberg expect the year-on-year inflation rate to jump to 4.7% in May, according to figures released by the Labor Department on Thursday, from 4.2% in April.

The “core” inflation rate, which excludes more volatile food and energy prices, is expected to drop from 3% in April to 3.4% in May, according to economists surveyed by The Bloomberg Project. This would be the highest level since the mid-1990s.

Jay Powell, Chairman of the Federal Reserve, insisted that the rise in consumer prices is transient and that the central bank should maintain its $ 120 billion per month bond purchase program. Wall Street, on the other hand, is questioning whether the rise in inflation could prove to be more persistent than expected, while investors say May’s result, even if it is higher than April’s, will be. probably too early to provide a definitive signal.

Rising inflation expectations were a key factor in the massive sell-off of US Treasuries this year, which pushed up borrowing costs and caused several bouts of volatility in other markets.

“It will probably be another 4% figure [for non-core inflation], which will temporarily strengthen the fear side of the equation, ”said Jason Pride, investment manager in Glenmede’s private management practice. In July and August, he added, “we’re probably going to start to see more consistent moderation in the CPI numbers. And that will finally start to reinforce the thesis that it is transitory. Aziza Kasumov

How will the improving outlook for the euro area affect the ECB’s policy plans?

The outlook for the euro area economy has improved considerably since the European Central Bank’s last monetary policy meeting in April.

Coronavirus lockdowns have been lifted across Europe. Vaccinations speed up after a slow start. Economic activity, consumer confidence and inflation have all rebounded strongly.

But a series of ECB board members said they still saw no reason to change policy at this Thursday’s meeting, and its president Christine Lagarde even said late last month that he was “far too early” to discuss plans to limit its 80 billion euros per month. bond buying program.

Inflation in the 19 eurozone countries climbed to 2% in May from 1.6% the month before, exceeding the central bank’s target for the first time in more than two years. However, ECB officials said this was a temporary hike that will fade over the next year, meaning the central bank needs to maintain its support policy longer.

Most economists agree. Holger Schmieding, chief economist at Berenberg, said: “As the current surge in headline inflation so far reflects only temporary factors, the ECB can afford to keep the pedal on the metal for another three months. “

The problem is that some countries, like Germany, are expected to recover faster than others like Italy and Spain, which, according to rating agency Moody’s, in a report last week, “will pose challenges for the ECB in terms of calibrating a common monetary policy ”. .

But Moody’s added: “We believe the ECB will maintain its very accommodative monetary policy over the next few years, well after relatively stronger economies like Germany run out of spare capacity.” Martin arnold

Will the renminbi resume its strong ascent?

The renminbi will be closely watched by traders after the Chinese government took action last week to slow a strong recovery.

The measures, announced by the People’s Bank of China, will force lenders to hold more foreign currency – a method of tempering currency not deployed since the financial crisis.

The renminbi has gained 11 percent against the dollar over the past year, despite wobbling last week. The rally took place against the backdrop of China’s rapid recovery from the pandemic. Investors rushed to invest in Chinese stocks and bonds last year, helping to further support the currency.

Its strength now poses another challenge for policymakers already grappling with high commodity prices and concerns about leverage in an unbalanced economy.

The country’s recovery was fueled by industrial growth and, despite the strength of the renminbi, by booming exports. But members of the central bank have expressed growing concerns over the impact of a global rally in raw materials on ex-factory prices in China.

Last month, an editorial by a PBoC official suggested that the renminbi should be allowed to appreciate to offset rising commodity prices, but the article was later deleted. A stronger renminbi against the dollar makes Chinese imports cheaper.

This week’s trade and inflation data, released on Monday and Wednesday, respectively, will further shed light on the economy’s progress and should inform future interventions by the central bank on the renminbi. Thomas hale

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