America may be nearing peak inflation, but that won’t be apparent in CPI figures for March, the marquee data point in a holiday-shortened US trading week.
Consumer prices likely rose 8.4% last month from a year earlier, economists reckon (figure below).
Rates are caught between Fed tightening, price pressures and the distinct possibility that in the process of deploying the former to curb the latter, Jerome Powell will push the world’s largest economy into recession. Equities are already trading defensively and a downturn is quickly becoming the consensus.
The tension between soaring inflation and the prospect of a Fed-induced slowdown is apparent in debates about the durability of the selloff at the US long-end. Bonds, which are coming off one of the worst quarters in history, may be due for a rally in the event growth concerns outweigh worries about unanchored inflation expectations.
That said, I’d note that even with the aggressive selloff, yields are nowhere near commensurate with CPI.
The historical relationship between headline consumer prices and 10-year US yields suggests the latter should be near 9%. The red squares in the figure (below) represent recent inflation prints.
“The sensitivity of 10-year US Treasurys to trend inflation is higher than its sensitivity to trend growth,” SocGen’s Subadra Rajappa said. “It is the uncertainty about longer-term inflation which really drives bond yields, because uncertainty about growth is limited to the next few years,” she added, in an April 7 note.
That would underscore the notion that yields have considerable room to press higher in the event policymakers aren’t successful in beating back inflation in time to mute the impact of the recent surge on the longer-term trend. “Central banks’ targeting a given level of inflation should make inflation mean-reverting towards this target, unless the future tells us central banks cannot effectively control inflation,” Rajappa went on to write, in the same note. “Another question is whether a scenario of possibly depressed growth in the coming years could stop the supply-related bounce of inflation, thereby capping the increase in long maturity yields.”
The inflation figures, due Tuesday, will make plenty of headlines. And those headlines will compete for space above the fold with news about the war. The conflict in Ukraine was poised to enter a new phase as Vladimir Putin focuses on consolidating control in the east with a new theater commander at the helm. General Alexander Dvornikov presided over the initial stages of Russia’s intervention in Syria, including a brutal campaign to retake Aleppo. I’d note that a more famous general, the late Qassem Soleimani, oversaw ground operations during that siege.
“Military analysts and US officials familiar with intelligence assessments have speculated Russia’s generals have a goal of presenting Putin with some tangible battlefield progress ahead of Victory Day on May 9, when Russia observes the defeat of Nazi Germany and traditionally marks the occasion with a parade in Moscow’s Red Square,” CNN, which initially reported Dvornikov’s appointment, said. Dvornikov has “a pretty savage track record in Syria,” former UK ambassador to Russia Sir Roderic Lyne told Sky News, noting that Putin needs to “gain some territory in Donetsk [to] present as a victory.”
Over the weekend, Boris Johnson visited Kyiv in a show of solidarity following a rocket attack on a train station in Kramatorsk which killed dozens of civilians, further galvanizing international opinion. “Ukraine has defied the odds and pushed back Russian forces from the gates of Kyiv,” Johnson said. Ukrainians “have shown the courage of a lion but you, Volodymyr, have given the roar of that lion,” Boris told Zelenskiy.
The ECB meets this week, and no policy changes are expected following March’s hawkish pivot. Faced with record high inflation, policymakers had no choice but to proceed down the long road to normalization, albeit while mentioning the war at every turn. Christine Lagarde will likely reiterate some version of the rhetoric from last month’s meeting. The latest CPI data out of Europe was alarming, to put it nicely (figure below).
“For eurozone officials [the April policy meeting] is likely to mark another moment of angst contemplating a unique shock that threatens both price stability and economic growth in a region still scarred by the coronavirus ordeal,” Bloomberg noted, calling Lagarde’s own bout with COVID “a vivid reminder” that the pandemic “still lingers.”
Also notable: Canada is seen becoming the first G7 nation to hike rates by 50bps in the pandemic era. “We do not think this is the right moment for the BoC to fight the market: The OIS curve is pricing in 45bps of tightening, and forecasters are in broad agreement that the Bank will hike by 50bps,” TD’s rates strategists said late last week. They’re looking for 50bps in April, 50bps again in June and 25bps at every meeting for the remainder of 2022.
In a stark reminder of the policy divergence opening up between advanced economies and China, market participants are on high alert for easing from the PBoC. Inflation figures are due in China as well.
Also on deck in the new week stateside: NFIB, PPI, Empire manufacturing, the preliminary read on University of Michigan sentiment for April and retail sales. Economists are keen to gauge the psychological health of the US consumer. Some believe it’s just a matter of time before spending falters. Consensus expects the Michigan gauge to deteriorate further, to 58.8. It’s already at a decade low.
Finally, supply will be in focus. “With 10-year yields at the cycle highs and the market in max-bearish mode, it follows intuitively that an auction concession is the path of least resistance [but] it’s less obvious whether that has already been established given the magnitude of the latest leg of the repricing,” BMO’s Ian Lyngen and Ben Jeffery said, adding that “coming out of the auction process long with a flattening bias into the holiday weekend continues to resonate, if for no other reason than the highest yielding auction of 10s since February 2019 and 30s since May 2019 will surely prove enticing to a segment of heretofore sidelined buyers.”
As part of jonhnson’s visit antiship missiles were promised to Ukraine. If those missles are delivered and effectively used it could be a devastating blow to Russia’s war effort and to Putin’s narrative. An increasingly desperate Putin is a scary proposition.
I think the antiship missiles are badly needed and would definitely get Putin’s attention if successful. The ultimate would be the delivery of missiles that can hit and destroy Russia’s missile factories.
… and a few oligarch’s McMansions.
H-Man, the war against inflation appears similar to the war in Ukraine. Transitory inflation would disappear while Russia would walk over Ukraine in a couple of days. Well we all know how that went. So it appears the war in Ukraine will drag on just as the war on inflation will do the same.