Peak inflation nations

Has US inflation peaked?

Equity markets ex-China are rallying today as US equity futures jump in Asian trading. Overnight, US inflation hit multi-decade highs, with YOY inflation printing at 8.50%, while core inflation rose by 6.50% YOY. But the perpetually bullish FOMO gnomes of the equity market, desperately searching for more drinks to keep the party alive, found it in the core inflation MoM data for March. Core Inflation undershot forecasts, rising 0.30% versus 0.50% expected.

That was all equity markets needed, using the singular data point to price in peak inflation in the US. Equity markets staged an impressive intraday rally and US yields eased somewhat at the long end. However, Federal Reserve President Lael Brainard, the dove who released the hawks last week, appeared on the wires still brandishing her talons vis-à-vis US monetary policy. That stopped the rally in its tracks, sending Wall Street to a slightly negative close.

Of course, it is not just the US that is grappling with inflation. India’s inflation rose back to early pandemic highs, climbing to 6.95% YoY for March, while Industrial Production flatlined, growing at just 1.70% YoY for February. The Indian rupee only eased slightly yesterday though, and you could put that down to a strong US dollar overnight.

This morning, my embarrassingly incompetent central bank, the Reserve Bank of New Zealand, delivered a hawkishly dovish rate hike. As predicted (even I get lucky sometimes), the RBNZ lifted its policy rate by 0.50% to 1.50%, versus market expectations of a 0.25% rise. The RBNZ noted that it was going to bring forward monetary normalisation to combat inflation. But tellingly, it left its terminal policy forecasts for 2022 and 2023 unchanged. So, it intends to check-in at the airport five hours ahead of departure, instead of 2 hours before departure. NZD/USD leapt 0.50% as the decision was announced but has since sunk all the back to down 0.10% on the day at 0.6845.

New Zealand remains my most likely country behind Russia to experience an economic hard landing this year. Sri Lanka and Pakistan have already got there. For my fellow Kiwi readers of this newsletter, I summarise the state of New Zealand thus. “The RBNZ and Government have commandeered and not consolidated the economy, I smell a RAT.”

So, what can we take away from all of the above? It appears that the market is swinging quickly to try and price “peak inflation.” The assumption is that the yield curves in places such as the United States, Britain, Europe, Australia and New Zealand have already moved higher to such an extent, that their respective central banks are now just “filling in the gaps.” Markets, after all, are forward-looking and in their wisdom have already pre-empted inflation and the central banks’ responses.

Naturally, “peak inflation” should be a reason to pile back into equities, especially as with the microbial attention span of people these days thanks to our smartphones, we are already seeing Ukraine fatigue/complacency setting in. However, it just isn’t that simple. In no particular order, the environment for equities remains challenging. President Putin said Ukraine negotiations are a dead end. Both sides are preparing for round two of the war, this time to be fought in open tank country. Russian oil production has fallen below 10 million barrels per day and OPEC is showing zero signs of moving to fill the gap. Only a return by Iran and Venezuela could do that.  China’s Covid-zero policy is a looming threat to world growth. Ostensibly deflationary, severe disruption to China’s production lines and port exports will be inflationary, not deflationary. The slow-moving train wreck of China’s property sector. An impending US earnings season could highlight reduced earnings outlooks for many heavyweights.

Notably, the US dollar kept rising overnight and US yields have not given back any meaningful recent gains. Oil prices are rising again, and bitcoin is showing no signs of rallying. The story appears to be an equity market one, with other asset classes far more cautious. Perhaps the most cautionary note is gold, which has rallied to multi-week highs this week, despite a much stronger US dollar and US yields. Either the gold market is walking into a bull trap – entirely plausible – or it is telling us something equity markets are ignoring.

The bottom line is that one monthly data point from the US does not a turning point make. Certainly, Chinese equities don’t think so.

On the subject of China, its March Trade Balance has just been released. The headline number in US dollar terms shot higher to USD 47.38 billion versus USD 22.4 bio expected. The headline flatters a worrying set of data, though. Exports outperformed, rising by 14.70% in March. However, imports, instead of rising by 8.0%, flat-lined to -0.10%. Slumping imports will make the noise around slowing China growth intensifies and its ramifications will shake nerves in the rest of Asia. The data shows that demand internationally for China products remains as robust as ever and mass Covid-zero shutdowns will lead to higher pricing pressures around the world. None of this trade data makes particularly good reading for anyone today.

The United Kingdom releases a swath of inflation, core inflation, RPI and PPI data today. There are upside risks to all of it and higher than expected numbers will increase the pressure on the Bank of England to accelerate tightening. That may save the sterling from an ominous technical break of support at 1.3000 on a closing basis. The US PPI will be of passing interest if it slightly undershoots MoM. That may give more ammunition to the equity bulls. The Bank of Canada is expected to announce a 0.50% rate hike this evening as it plays catchup. Finally, given the oil rally overnight, tonight’s official US Crude Inventories should be good for volatility, especially if they retreat sharply.

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