It’s inflation Jim, but not as we know it…

Last night’s US Consumer Price Inflation data continued highlighting that inflation is alive and well. Looking at the MoM data, my preferred measure for the direction of travel, rather than the heavily distorted YoY measures, revealed another month of sharp rise by headline and core inflation readings. Headline inflation rose by 0.60% versus 0.40% expected. Core inflation rose by 0.70%, also versus 0.40% expected.

Applying some Vulcan logic to the numbers, one would have expected US yields and the greenback to rise and equities to fall. Instead, precisely the opposite happened, leaving many disappointed inflationistas scratching their heads, including those with pointy ears mumbling about how illogical humans are.

US long-dated bond yields had been falling since last Friday’s Non-Farm Payroll miss, suggesting that the market’s path of least resistance was to follow the Federal Reserve transitory inflation path. A course that conveniently ties in with underlying the financial world’s positioning since March 2020; that is, buy everything you can except the US dollar. Financial markets have long raised a selective use of facts to an art form.

Although the US inflation measures rose once again and slightly above forecast, the actual increases were less than those recorded in April. But, with the thoughts above in mind, that was all the street needed to return to its buy-everything happy place. Demand for US treasuries remains insatiable, high global savings rate are still looking for a home in a zero per cent world, and all that central bank money is still flooding the system. The inflation data needed to either fall dramatically or print much higher than last month to move the needle. In the end, it came in at no man’s land levels triggering a reversion to the mean behaviourally for financial markets.

Next week’s FOMC meeting will now be a non-event, with the Fed knowing the market is happy to sign up to the transitory narrative. President Biden’s infrastructure and build back better wish list looks in big trouble in the US Senate as well. A much slimmed-down version would mean less US government borrowing in the future. Happy days for the buy everything trade. The only thing I can think of that would move the needle would be a “t-word” mention next week, unlikely, or a two million-plus Non-Farm Payrolls next month, also unlikely.

So, sit back and keep buying everything.

Elsewhere in Asia, the data calendar is thin on the ground today. South Korean Import and Export Prices showed sharp rises YoY but given its comparison to the depths of the pandemic a year ago, the increases will surprise nobody. Malaysia and India should also show galactic-level increases in Industrial Production later today, but the same distortion from YoY comparisons apply. Both are grappling with pandemic issues right now, and a negative impact on shorter-term data releases will be more apparent in the weeks ahead.

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
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is 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, Channel News Asia as well as in leading print publications including 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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