Inflation data, $3 gasoline, and another crypto warning.
Price rises
The dominant theme in markets recently has been inflation, so today’s reading at 8:30 a.m. is getting a lot of attention. The median estimate from economists surveyed by Bloomberg is for prices to have risen 3.6% from a year earlier in April, with a large base effect in the data coming on the anniversary of Covid lockdowns. Both Fed officials and many large investors remain confident that the bout of inflation will be temporary. Meanwhile, Republican opponents of President Joe Biden’s spending plans are pouncing on rising inflation to caution against further government spending.
$3 gas
The surging prices of raw materials has been one of the major drivers of inflation worries in markets in recent weeks. For U.S. consumers, however, it is price rises at the pump that will be most immediately felt with the national average for a gallon of gasoline moving above $3 for the first time since 2014. While the immediate catalyst for the rise is supply issues arising from the continued disruption of operations at Colonial Pipeline, crude oil is up more than 35% this year. The International Energy Agency this morning said that the supply glut created by the pandemic has cleared.
Warning
The U.S. Securities and Exchange Commission warned investors in mutual funds that hold Bitcoin futures to beware of the risks in the “ highly speculative” asset. A Bitcoin ETF seems to be as far away as ever after recent comments from SEC Chair Gary Gensler seemed to pour cold water on the idea. There is, however, no shortage of speculation in the space, with the amazing performance of the crypto called “Internet Computer” a case in point. The token was launched on Monday and was worth $45 billion by Tuesday.
Markets slip
Global equites remain under pressure this morning as investors await the crucial U.S. inflation number. Overnight the MSCI Asia Pacific Index dropped 1.1% while Japan’s Topix index closed 1.5% lower. In Europe, the Stoxx 600 Index was 0.2% higher at 5:50 a.m. as strong earnings helped keep the gauge in the green. S&P 500 futures pointed to a drop at the open, the 10-year Treasury yield was at 1.613% and gold slipped.
Coming up...
Latest crude oil inventory data is at 10:30 a.m., with the WASDE May crop report at 12:00 p.m. Three regional Fed Presidents and Fed Vice Chair Richard Clarida speak today. The U.S. will sell $41 billion of 10-year notes at 1:00 p.m. The monthly budget statement of April is at 2:00 p.m. The Sohn Investment Conference begins. Bumble Inc., Wendy’s Co. and Vroom Inc. are among the companies reporting results.
What we've been reading
Here's what caught our eye over the last 24 hours.
And finally, here’s what Joe's interested in this morning
Happy CPI Day! Talk of inflation is in the air non-stop.
According to Bank of America, mentions of inflation on corporate earnings calls were up 800% from a year ago. And if you look at Google Trends, search interest for inflation is at its highest ever.
In addition to price pressure, we also have a range of shortages (lumber, chips, you name it.) And now we also have gas lines, and although that's due to the ransomware hack and has nothing to do with the macro conditions, it's all part of the zeitgeist.
So amidst all this, perhaps the most surprising things is that we really aren't seeing any upward impulse in nominal rates at all. Here's a chart of five-year bond yields. We had that substantial upward pricing in March, when people really started appreciating how fast GDP was starting to grow. But since then... not much.
In addition to price pressure, we also have a range of shortages (lumber, chips, you name it.) And now we also have gas lines, and although that's due to the ransomware hack and has nothing to do with the macro conditions, it's all part of the zeitgeist.
So amidst all this, perhaps the most surprising things is that we really aren't seeing any upward impulse in nominal rates at all. Here's a chart of five-year bond yields. We had that substantial upward pricing in March, when people really started appreciating how fast GDP was starting to grow. But since then... not much.
Ultimately the nominal five-year Treasury yield is a reflection of the expected short-term rate path over the next five years, and so what this means is that the market believes the Fed when it says that it's not planning to hike rates anytime soon and that it's going to look through this burst of reopening inflation. In other words, the market believes the Fed's commitment to adhere to its new framework.
This wasn't always a given. Fighting inflation is perceived to be a core part of the Fed's DNA. And it's easy to imagine that on Earth 2, various members of the FOMC, particularly the regional Fed presidents are already getting a little weak in the knees and talking about talking about tapering in light of rising price pressures, and a high number of job openings. So far the only one who's talking like that really is Dallas Fed President Robert Kaplan, but he was never on board with the new framework, so that's not too surprising. As George Pearkes of Bespoke Macro recently noted, even Cleveland Fed President Loretta Mester, who used to be hawkish during previous cycles, has been in line with Powell's vision this time around.
Of course some of that unanimity could break at some point. But so far the message from all the Fed speakers has been remarkably consistent, and the market reaction shows the message is getting through. It's a pretty impressive communications accomplishment, if nothing else.
And while we're here, just a reminder that I'm writing more these days over at Bloomberg.com/OddLots (and NI ODDLOTS on the terminal) our new blog, so please check that out. It's for subscribers only, but you can get a deal on a subscription if you click here.
Joe Weisenthal is an editor at Bloomberg
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