Inflation is knocking at the door

When you see American Airlines fall 8% because it announced a bigger-than-expected loss in the first quarter, you are fine with that information. But when you see Netflix plunge 10% after-market because it missed estimates, that’s a shocker. Netflix surprised to the downside yesterday, as the company added less than 4 million subscriptions in the first quarter versus 6 million expected by analysts and said it expects to add just one more million in June quarter, that’s a quarter of the 4 million expected by analysts. So, the low production costs helped but didn’t compensate for the slow revenue stream due to less production as well. It appears that Netflix started feeling the pinch of the end of the lockdown measures and the company could be reaching its potential for now.  

Else, Johnson&Johnson posted stronger-than-expected earnings and its vaccine will continue being given in Europe despite some issues. Phillip Morris International raised its outlook. But more importantly, Procter&Gamble said it will increase its product price due to higher raw material prices. Ouch for parents, Pampers's price will go higher, and ouch for the economy, because that’s how we will start seeing a further and perhaps a sustainable jump in inflation moving forward. The Federal Reserve (Fed) head Jerome Powell says that any rise in inflation won’t last long enough to compromise the Fed’s inflation target of ‘an average of 2%’, but as long as the price increases are justified by rising raw material costs, it may.  

For now, the US yields show no signs of stress, however. The 10-year benchmark is back to 1.56%. But at this point, I start questioning whether the rising inflation and stronger case for a more hawkish Fed policy isn’t just a way to say stop to the speculative price actions that we see in unexpected assets. Could the 8700% rally in Dogecoin explain why Jerome Powell seems so detached regarding the rising inflationary pressures? Because one thing that makes speculation so appealing for people who would not speculate otherwise is the fact that the low-risk assets, such as US or European treasuries do no longer compensate their holders. There is a huge pool of negative-yielding debt in the market. By the end of last year, it was just about $18 trillion; no wonder people look for alternatives. What’s crazier: paying to hold the German debt or buying Dogecoin. It’s open for discussion.  

In the FX, Cable slipped below the 1.40 handle, yet the reopening and prospects of improved economic activity should continue giving a hand to GBP bulls.  

Gold consolidates gains a touch below $1800 per ounce. Subdued US yields, rising inflation expectations, combined with supportive trend and momentum indicators build a stronger case for a further upside in gold prices in the short run. 

Finally, crude oil is testing the 50-day moving average ($61.50 per barrel) to the downside on the back of a retreat in global risk appetite, but the black gold should find some support approaching the $60 psychological mark.