Take Five: Focus on Fed-flation | WKZO | All Kalamazoo
1 / FÉD-FLATION GROUNDS
Markets will listen intently to what the Federal Reserve has to say about inflation at the end of their two-day meeting on Wednesday, amid fears that billions of dollars in fiscal stimulus could fuel higher consumer prices.
After years of very low inflation, a range of measures, including the Fed’s preferred core personal consumption expenditure (PCE) price index, are on the rise. The PCE rose 3.8% in the 12 months to May, its biggest jump in three decades.
The Fed insists that the gains in consumer prices will be temporary and that it has the tools to fight an inflationary surge. Signs that policymakers may be bracing for a more sustained rise in consumer prices could raise fears of quicker-than-expected unwinding of easy-money policies and hurt stocks.
-ANALYSIS-The employment-inflation compromise, exiled from the Fed’s policy, could mean a hot summer
Chart: Inflation is rising: https://fingfx.thomsonreuters.com/gfx/mkt/oakpebxjbvr/Pasted%20image%201623270566916.png
2 / START OF DEBT
The EU will issue its first bond under the € 800 billion post-pandemic stimulus fund, possibly in a few days.
Joint issuance of bonds may not do for Europe what Treasury Secretary Alexander Hamilton did in 1790 for the newly formed United States: create a fiscal union. There are no plans to make the fund permanent.
Still, don’t underestimate the importance: the EU is on its way to becoming one of the world’s largest issuers with € 80 billion in stimulus fund bonds sold this year. And the arrival of big liquid bonds will not be lost on investors or the ECB, which can buy the debt for a strong stimulus.
-As the EU prepares its first bond issue, a reality check for ‘safe assets’ hopes
3 / RISE AGAIN
China released its industrial production and retail sales data for May on Wednesday. Both are expected to be lower than April’s figures, but will provide new insight into the economic outlook for the world’s second-largest economy.
So far, domestic consumption remains moderate. Exports have been overcompensated this year, but that is starting to change as the rest of the world opens up and spends less on Chinese manufactures.
Recent data shows Beijing is back on the deleveraging campaign it abandoned last year when the pandemic hit – meaning subtle measures to curb the yuan’s rise, limited and targeted budget spending, a scrutiny of real estate and local sectors and measures to cool commodity prices. .
-China’s highest producer inflation in over 12 years highlights global price pressures
Chart: rate and inflation in China: https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgxlqbvq/Pasted%20image%201616060929088.png
4 / SET
The high-level meetings over the next few days will keep geopolitical issues in turmoil and the Turkish and Russian markets on alert.
On Monday, the NATO summit will begin in Brussels, with a first face-to-face meeting between US President Joe Biden and his Turkish counterpart Tayyip Erdogan. On the agenda, Syria, Afghanistan and “important differences” according to a senior US official, Ankara and Washington disagreeing on a multitude of issues.
On Wednesday, Biden will take on Russian President Vladimir Putin in Geneva for what promises to be heated talks with bitter disputes over election interference, cyber attacks, human rights and Ukraine.
-Biden, Putin will meet in an 18th-century Swiss villa for the summit
Chart: The Rising Cost of Geopolitics: https://fingfx.thomsonreuters.com/gfx/mkt/azgpooyyzpd/Russia%20Turkey%20CDS.PNG
5 / GROWTH WITHOUT THEFT
Is the newly hawkish Reserve Bank of New Zealand about to see its first quarter growth forecast surpassed? The kiwi’s GDP lands on Thursday and the central bank believes it will be negative, putting the country back into technical recession.
Partial indicators, however, say this may not be the case. While the absence of foreign tourists will be severely felt, domestic consumption has been robust and the prices of raw materials – especially milk and timber – have developed favorably.
A beat may not mean lasting strength, but a big surprise would suggest an economy on more solid footing than the RBNZ appreciates, adding pressure to normalize politics even faster than the aggressive timeline reported last month.
-New Zealand manufacturing sales increase in first quarter Chart: New Zealand economy is about to grow: https://fingfx.thomsonreuters.com/gfx/mkt/nmopaebmqpa/Pasted%20image%201623314971746.png
(Reporting by Tom Westbrook and Vidya Ranganathan in Singapore, Dhara Ranasinghe and Karin Strohecker in London, Saqib Ahmed in New York, compiled by Karin Strohecker; editing by Toby Chopra)