Inflation genie returned to its bottle

The buy-everything animal spirits refused to be caged any longer overnight as financial markets returned the inflation genie to its bottle. Technology was back, the S&P 500 and Dow Jones closed at record highs, US yields held steady, bitcoin rose, and the US dollar fell, with markets partying like it was 2020.

ECB to accelerate pace of bond purchases

Earlier in the evening, the European Central Bank remained unchanged and signalled it would accelerate the pace of QE buying to cap yields. The euro gained a pass mark, it seemed, because the ECB did not increase the size of the QE programme; instead, they chose to front-load it.

US Initial Jobless Claims fell to 712,000, its lowest since November, allowing another reason for the bulls to escape from their pens. The US 30-year bond auction also passed without incident. Although the bid-to-cover ratio wasn’t spectacular, like the 10-year the day before, most of the issue went to direct buyers, not primary dealers, indicating an underlying broader demand. That was the last potential barrier for the week for simmering global recovery demand.

Another tailwind came from the White House, where President Biden signed the stimulus into law with cheques heading out the door almost immediately. Speaking this morning, President Biden stated that all adult Americans would have access to a Covid-19 vaccine by May, well ahead of the previous schedule.

All in all, there were few reasons to be anything other than business as usual into the end of the week. The fall in the US dollar overnight will be particularly welcomed by Asian countries, who had an uncomfortable week watching it strengthen in their dirty peg world.

With regular service resumed, we can expect markets globally to end the week on a positive note. So, have we reached “peak inflation sentiment?” Probably not. The Biden stimulus will be positive for American and Asian markets in the short-term. Still, its effects, and those of the general recovery, will start to accelerate in the March data everywhere. The inflation we will see is recovery inflation, not stagnation inflation. With the Federal Reserve comfortable with a steeper yield curve, more adjustment to a higher cost of capital is still required. The inflation genie may have been put back into its bottle for the weekend, but someone is sure to pick it up and uncork it again soon.

Moving past the buy-everything of today and into next week, the data calendar is a juicy one. Monday starts with China’s Industrial Production and Retail Sales and Indonesia’s Balance of Trade, and India’s WPI. Pan-Europe inflation and US Retail Sales follow on Tuesday. Wednesday will see the latest US FOMC rate decision, followed by Bank Indonesia on Thursday and the Bank of Japan on Friday.

In that extensive list, the FOMC governors’ dot plot of future rate expectations will probably garner the most interest, as no changes to any interest rate benchmarks from the central banks are expected. Markets will be watching for signals that FOMC members have bought forward expectations of future rate hikes. That could be enough to reignite to mini-taper-tantrum once again, making Thursday’s session in Asia an interesting one.

On a final note, one alarm bell that is ringing is gold. Gold traced out a double top at USD1740.00 an ounce overnight but finished the day slightly lower for the session. The overnight environment should have provided fertile conditions for a sustained gold rally. To say the overnight price action was disappointing is an understatement. Gold’s asthmatic recovery has probably run its course for now, and looking at bitcoin’s price action overnight; I can’t help feeling cryptos are eating its currency debasement lunch. Expect more pain and new lows for long-suffering gold bulls next week.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell 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 all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro 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 and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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