US inflation higher than expected
US Inflation printed at 8.30% YoY overnight, less than the previous month’s 8.50%, but slightly more than the 8.10% median forecast by markets. Equities vacillated after the data as the street tried to make up its mind whether to price in “peak-US-inflation,” or not. In the end, the no’s won the day as the realisation sunk in that the data reinforced the Federal Reserve’s hawkish bias, and that even if US inflation is coming down now, it’s going to do so at a snail’s pace. That reality was reflected in the US yield curve, with 2-year yields firming, while 10 and 30-year yields fell once again. The pivot in the yield curve likely explains why currency markets were left in neutral, while equities indulged in their usual schizophrenic tail-chasing.
Energy prices also ramped higher overnight, with oil climbing by around 6.0%. Trans-Ukraine gas pipeline disruptions are playing their part, as did an improvement in the covid situation in Shanghai, which is rapidly reopening. US crude inventories showed a surprise leap in crude stock by around 8.5 million barrels, but gasoline stocks slumped by over 3.60 million barrels, and distillates were flat. The market remains incredibly tight for refined oil products in the US and if one adds in the 6 million barrels fall in US SPR stocks, crude inventories only rose by around 1.50 million barrels.
The energy picture is further muddied today by the news that President Putin has announced sanctions on European energy companies that were previous JV partners with Gazprom and its ilk. Trans-Ukraine gas flows have slowed as well as Ukraine declares a force-majeure on one its pipelines from Russia to Western Europe. I’m not sure what impact the Putin sanctions will have on European gas supplies, if any. But if Russia is messing with European gas supplies, and with an EU import ban on Russian oil in the works, you can be fairly certain that oil prices have limited downside. That is another inflationary headwind to the world and with grain disruptions from Ukraine and Russia, markets continue to under-price the Ukraine war’s risks to the global economy this year. Hold off on buying euros on the dip as well.
That reality is grudgingly starting to permeate Asian markets. In a stagflationary environment, there are no good choices for central bankers and monetary policy. Keep rates low and watch inflation explode and your currency evaporates, hike rates and watch a sharp slowdown develop in economic activity. Singapore and South Korea have already started tightening although I believe the chances of an unscheduled move to tighten by Singapore’s MAS are rising. India has also moved to hike rates and yesterday Bank Negara Malaysia also hiked by 0.25%. Philippine’s GDP today leapt by 8.30% in Q1 YoY and will likely force the BSP to hike next week. Indonesia will not be far behind them in June. Philippine RPI and Indonesian Retail Sales later today could reinforce that premise.
That will leave China and Japan as the last doves standing. Thankfully, both have benign inflation environments. Google Japan, deflation, 30-years for an explanation there. Markets tried to price in more China stimulus yesterday, lifting equities as Shanghai’s reopening accelerates. But it has run out of steam today despite the noise around supporting the economy by the PBOC this morning. China’s covid-zero policy will continue crimping growth, but it won’t be immune from the Ukraine/Russia stagflationary wave either. Nor has China’s property developer debt woes gone away, with news that major developer Sunac has missed a foreign currency bond payment, and statements suggesting it will struggle to meet future ones.
Little surprise then that both the Japanese yen and the Chinese renminbi remain under pressure, with growth concerns and a widening US/Asia interest rate differential the key drivers. Interestingly, Asian currencies ex-Japan and China are also under the hammer today as well. It could be that financial markets are testing the resolve of Asia’s central banks now, or it is part of a general de-risking across the globe by investors. Either way, with the US expected to hike much faster than Asia, I expect the next six months to be torrid for local currencies, exacerbating imported inflation pressures.
The United Kingdom releases the mother of all data dumps early this afternoon Asian time. It features GDP, Business Investment, Industrial Production, Construction, Trade Balance, and Manufacturing. You would have to say that all of that data has downside risks. Along with cost-of-living pressures prompting speculation of an emergency budget, the UK is also making its life even harder by once again making noises about suspending the Brexit Northern Ireland protocol. The EU has quite rightly said that it will suspend the entire agreement if that happens.
You would think that with a war in Eastern Europe the UK government would leave Northern Ireland for another day, but this BoJo is not for turning. Little wonder with that smorgasbord of risk outlined above that sterling slumped overnight, even as Euro remained relatively calm. Sterling may be oversold on short-term indicators, but data and politics could subsume that. GBP/USD is wobbling at 1.2215 this morning and I would not be surprised to see a 1.1900 handle on it by the end of the week.
This evening, the US releases its PPI data for April and weekly Initial Jobless Claims. The impact should be limited now that inflation data has been released. We will have the usual plethora of Fed speakers to shake up volatility intraday, but I expect to see attempts to reprice inflation/recession/tightening/geopolitics continue to dominate proceedings. Sitting on the sidelines with a bag of cash and some earplugs in is my preferred strategy.
Finally, I am continuing to monitor the crypto-space. Bitcoin closed below USD 30,000.00 overnight, sinking 6.50% overnight, and falling another 6.30% to USD 27,150.00 this morning. My chart picture is calling for a fall to the USD 17,000.00 region and bitcoin would need to close above USD 33,000.00 to give pause for thought. Only a close above USD 38,000.00 would signal the downside danger has passed. The rot has spread from the turmoil in the (un)stable coin space. If the one-to-one pegs on the US dollar backed instead of algorithmic (un)stable coins crack, things are going to get ugly fast and may lead to cross-margining selling in other asset classes. Off course, the main (un)stable coin issuers could release to the public view, incontrovertible proof that they hold a US dollar for every coin they’ve issued, in real-time. Just asking for a friend. Otherwise, crypto markets may find themselves at the end of their tether.
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