US inflation at 5% there will be more inflation than the Fed expects says Bridgewater Associates founder Ray Dalio. This seems to be true based on the recent inflation statistics. Yesterday the high CPI numbers didn’t cause a massive immediate reaction in equity futures markets but selling intensified during the New York cash session. On a yearly basis, the CPI was up 4.2% but some might argue that this includes a fair amount of base effect. In order to exclude the base effect, it makes sense to look at the change in inflation over the last six months. This shows that inflation in the US is running at an annualized pace of 5.0%. This was confirming the fears that there’s more to this inflation story than just the base effect. In other words, inflation doesn’t look at all as transitory as the Fed would like us to believe. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
Fed officials, amongst them Fed Vice Chair Clarida again yesterday, have over and over again reiterated the view that inflation pressures should be transitory. According to Clarida stimulus would still be needed for “some time”. Reuters quotes a JPMorgan economist saying that: “It likely would take a very strong May jobs report, with sizable upward revisions to March and especially April, to get the Fed to start a discussion about tapering at its June meeting”. JPMorgan expects the Fed to begin scaling back its pace of asset purchases early next year.
The markets are worried though that the central bank might have to act sooner than it would like. This gave control to the bears and kept the bids soft. The S&P 500 came down 2.1%, the Nasdaq Composite (-2.7%) and Russell 2000 (-3.3%) were even weaker while the DJIA declined 2.0%. The inflation-sensitive 10-yr US Treasury yield moved up by eight basis points to 1.70% after trading flat before the CPI report. As we have pointed out before rising rates are an additional headwind for growth stocks. This explains why Nasdaq and Russell 2000 underperformed yesterday.
Major USD Rivals
We said on Tuesday that the US Dollar Index (DXA) signals that institutional traders are closing USD shorts. Presumably rising Treasury yields are a factor at play in this and if the consolidation seen yesterday continues today the likelihood of USD Index strengthening increases. Now DXA is trading 0.5% higher than on Tuesday at the time of the publication of the above-mentioned analysis. The biggest losers against the USD since Tuesday’s report have been NZD (-1.38%) and AUD (-1.35%) while CAD (-0.16%) and GBP (-0.33%) have held their ground better.
The rise in yields supported the USD and as expected weighted on gold. At the time of writing this gold is trading 1818, off from 1840 resistance that was tested multiple times. Oil prices backed tried to challenge the May 5th high but failed as the USD strength pulled the price away from two-month highs. The news that US crude exports plunged weighed on oil. Reuters reports, however, that according to the International Energy Agency demand was already outstripping supply. USOIL is currently trading at 65.40.
Bitcoin dropped more than 10% as Elon Musk said that Tesla Inc has stopped accepting bitcoin to purchase its vehicles. Musk is concerned about the use of fossil fuel in bitcoin mining and transactions. This weighed down other crypto assets too. Ethereum dived over 17% before attracting buyers again and Litecoin dropped almost 24% after trading near its all-time highs on Monday.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||The Fed has on several occasions repeated its commitment to ultra-accommodative monetary policy. The rates are likely to stay near zero while asset purchases continue.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration has indicated it will seek to deliver another two trillion dollars in infrastructure spending.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower for about one month now. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Payrolls||Friday’s miss in payrolls was the biggest in the recorded history. Analysts expected to see one million new jobs in April but the actual number came in at 266K (down from 770K in March).|
|Inflation||The price of lumber has increased approximately 700% in a year while the price of copper has gained 100% in the same period. US stocks are trading at all-time highs. The CPI has started to rally lately. Over the last 6 months, inflation is running at a 5% annual pace.|
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Market News & Facts
- Tesla stops accepting bitcoin as payment for its vehicles
- Bridgewater: There will be more inflation than the Fed expects
- UK first-quarter GDP -1.5% vs. -1.6% expected (+1.3% previous)
- Australia in danger to lose AAA rating
- Bridgewater founder Ray Dalio: government spending to devalue USD
- Tesla has halted plans to buy land for its Shangai facility
- Biden threatens unemployed with loss of benefits if they don’t accept jobs
- Unavailability of semiconductor chips to cause inflation
- China’s population growth is slowing fast
- China’s CPI in line with expectations (0.9% vs. 1.0%)
- UK spending data shows a 39.6% rise yoy (previous 20.3% yoy)
- State of emergency in the US due to a pipeline cyber attack
- Australian business confidence 26 vs. 17 previous
- Historic NFP disappointment: 266K instead of 990K
The Next Main Risk Events
- USD – Unemployment Claims
- CAD – BOC Gov Macklem Speaks
- GBP – BOE Gov Bailey Speaks
- USD – 30-y Bond Auction
- USD – Core Retail Sales m/m
- USD – Retail Sales m/m
- USD – Industrial Production m/m
- USD – Prelim UoM Consumer Sentiment
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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