US inflation hits 5%

Market movers today

In the UK, the monthly GDP estimate for April is expected to show a strengthening of economic activity in the UK economy amid re-opening and strong housing market activity.

The Russian central bank is expected to raise its policy rate by 50bp to 5.50% as inflation is well-above the central banks inflation target of 4%.

The G7 meeting starts in the UK where the leaders, including US president Biden, should endorse a global minimum tax as well as bolstering vaccine delivery to developing countries.

The 60 second overview

US CPI: US May inflation surprised on the upside rising 5.0% y/y, which is the largest annual gain since August 2008. The monthly gain of 0.6% is the second largest monthly gain in more than ten years. Market consensus was 4.7% y/y and 0.5% m/m. A significant part of the rise was due to pandemic distortions in light of the re-opening of the US economy and the jump in the annual rate is in part to be blamed on base-effects. In that respect, the number supports the Fed view that the jump in inflation is transitory. But the details also seem to indicate that inflation pressure is becoming more broad-based. The core-CPI measure rose 0.7% m/m. The 3M annualized rate for core CPI is now at 5.2%. Despite the higher than expected CPI numbers, US 10Y treasury yields fell to 1.46% last night - the lowest level in three months. Analysts refer to a market strongly positioned for higher yields.

Cash abundance: The lower US treasury yields might also reflect a growing cash-glut in the US money market forcing investors further out on the yield curve. Yesterday, the usage of Fed's overnight Reverse Repo Facility jumped to an all-time high of USD 535bn. US money market funds are fuelling cash into the Reverse Repo at zero as liquidity jumps rapidly due the Fed's QE and the current rapid drawdown of the Treasury cash account.

ECB meeting: Despite upgrading its growth and inflation outlook the ECB yesterday said that it will keep the bond buying in the PEPP QE programme at a "significantly higher" pace in Q3. Hence, the temporary step-up in the pace in Q2 has been extended into Q3. According to Lagarde at the press briefing the decision was not unanimous. See also ECB comment from yesterday, Flash: ECB Research - ECB turning risk manager.

Scandi inflation: Inflation in Sweden and especially Norway came out lower than expected among other things as the currency appreciation seen over the last six months kept imported inflation low. The lower inflation print in Norway (Core CPI at 1.5%) does not change our call for a September rate hike from Norges Bank.  

Equities: Equities ended higher yesterday lifted by US large cap stocks. Equity investors struggle to find out what to think about CPI data surprising on the upside while yields continue to drop. Outcome so far, new record high in several indices and investors moving into growth out of value, now five days in a row. Defensives outperforming cyclicals and implied volatility dropping further. This kind of correlation will not be long lasting and we argue that down the road bond yields should move high and correlation between equities and fixed income become negative again. In the US, Dow +0.1%, S&P 500 +0.5%, Nasdaq +0.8% and Russell 2000 -0.7%. The positive sentiment continues in Asian this morning with smaller gains. European and US futures slightly higher.

FI: After yesterday's ECB meeting and US CPI, EGB rates ended lower on the day. After the relatively upbeat economic assessment by the ECB and the better than expected US CPI figure, we saw a bond market sell-off by around 2bp, however, it was later reversed to leaving Bunds 1bp lower on the day. BTPs-Bund spread tightened 3bp. The ECB decision to keep the PEPP net purchases 'significantly' higher in Q3, while still strongly revising the projections higher indicates a 'win' to the doves. ECB 'sources' said afterwards that three GC members wanted to reduce the PEPP pace. ECB did what they could to try to keep volatility low through the summer. The main question remains whether markets believe given the divisions in the GC and the September meeting.

FX: Overview: In a fairly unusual session yesterday both USD and EUR ended as the sessions' clear underperformance among FX majors. NOK FX suffered from a weaker-than-projected inflation print but as with EUR/SEK, EUR/NOK also moved lower during the US session in a move primarily driven by broad-based EUR weakness. JPY gained on the move lower in US yields while GBP joined commodity currencies' move higher with the Bloomberg Commodity index reaching new highs above index 95.

Credit: Credit has been consistently tightening over the last weeks and yesterday was no exception. Xover tightened 4½bp (to 235½bp) and Main almost 1bp (to 47½bp). Cash bonds performed more modestly, with HY around ½bp tighter and IG only marginally tighter.