What inflation?

The major US indices gained following a stronger-than-expected inflation print yesterday. Nasdaq led gains.  

And if faster-than-expected inflation didn’t wreak havoc across equities posterior to the CPI release, it’s mainly because, despite the fastening inflation, the inflation expectations for the second half of the year are easing. 

Still, inflation in the US hit the 5% y-o-y in May, slightly faster than 4.7% expected by the consensus of analyst estimates. The core inflation accelerated faster than expected, as well. Given the fact that last month’s figures were also faster-than-expected, one may question whether the inflation expectations are fundamentally softer than what the reality has to offer. Could it mean that the market is wrong expecting an imminent downturn in inflation in the coming months? 

It could be, but market remains firmly on its position: inflation should ease shortly as two leading factors, the second-hand car prices – which explain a part of the current jump in US CPI, should ease, and energy and commodity should consolidate, and ideally pull back from their multi-year high levels. Otherwise, the US 10-year treasury yield would not have tanked below the 1.45% level as inflation hit 5%. So, the least we can say is that yesterday’s inflation data did not really awaken the Federal Reserve (Fed) hawks, nor triggered a sell-off across equities. 

Now speaking of soft central bank stance, the European Central Bank (ECB) gave a good one yesterday as well, by renewing its pledge to speed up its monthly bond purchases despite significant improvement in growth and inflation outlook. Inflation forecast was revised from 1.5% to 1.9% for 2021, then back to the 1.5-1.4% area in 2022 and 2023. In summary, the ECB also sees the actual inflationary pressures transitory, and not as a threat to its ultra-supportive monetary policy stance.  

If policymakers don’t seem concerned about inflation, why should investors. The liquidity party will carry on at least to the end of this year and a good part of the next. And there is a good chance that we see the Fed officials turning a blind eye on inflation as well at their next meeting, and kick the bond taper discussion down the road. Again, I would be surprised if the Fed officials had the taboo taper talk anytime before September.  

The EURUSD rebounded after slipping below 1.2150 and is on track for extending gains on the back of a globally softer US dollar. 

Gold flirts with $1900 per oz, again. Softening US yields should boost appetite in non-interest-rate-bearing gold, but easing inflation expectations should cap the upside appetite, this time.  

Activity in US and European futures hint at a slow but positive session. But gains in FTSE could remain limited due to a firmer British pound. 

Finally, mood in the cryptocurrency market is somewhat better before the weekend, and this time, on the back of some encouraging fundamental news. The international group of bank regulators proposes a strict set of rules for the crypto holdings. This is not the kind of news that please the crypto purists who want their cryptos out of the traditional money system, but regulation should give more credibility and stability to the sector and be positive in the long run. After all, official recognition is the key for a broader adoption.