Fed-flation in focus By Reuters

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© Reuters. FILE PHOTO: The Federal Reserve Board building is pictured in Washington, United States on March 19, 2019. REUTERS / Leah Millis / file photo

1 / FED-FLATION RUMBLING

Markets will listen carefully to what the Federal Reserve has to say about inflation at the end of its two-day meeting on Wednesday amid concerns that trillions of fiscal stimulus will fuel consumer price spikes.

After years of very low inflation, a number of metrics are rising, including the Fed’s preferred core price index for personal consumption expenditure (PCE). The PCE rose 3.8% in the 12 months to May, the largest increase in three decades.

The Fed insists that consumer price hikes will only be temporary and that it has the tools to combat a surge in inflation. Signs that policymakers are looking for a more sustained rise in consumer prices could raise fears of an earlier than expected monetary policy reversal and hurt stocks.

-ANALYSIS-job-inflation-compromise, banned from Fed policy, could mean a hot summer

Graphic: Inflation is heating up: https://fingfx.thomsonreuters.com/gfx/mkt/oakpebxjbvr/Pasted%20image%201623270566916.png

2 / DEBT BUT

The EU may issue its first bond under the € 800 billion post-pandemic recovery fund within a few days.

Joint bond issuance cannot do for Europe what Treasury Secretary Alexander Hamilton did for the newly formed United States in 1790 – to create a fiscal union. There are no plans to make the fund permanent.

But the importance should not be underestimated: with 80 billion euros in bonds for the recovery fund sold this year, the EU will become one of the largest issuers in the world. And the arrival of large, liquid bonds will not escape investors or the ECB, who can buy the debt for powerful incentives.

– While the EU is preparing its first restructuring bond, it is hoped for a reality check for “secure assets” Graphic: Emissions targets 2021: https://graphics.reuters.com/GLOBAL-MARKETS/dgkvlnarbvb/chart.png

3 / REMOVAL

China reported industrial production and retail sales data for May on Wednesday. Both are expected to be below April numbers, but will provide fresh insight into the economic outlook for the world’s second largest economy.

So far, domestic consumption has remained subdued. 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 manufactured goods.

Recent data shows Beijing is back to pursuing the deleveraging it abandoned last year when the pandemic broke out – that means subtle measures to contain a soaring yuan, limited and targeted budget spending, rigorous scrutiny of property and local government sectors, and measures to cool off the skyrocketing commodity prices.

-China’s highest producer inflation in over 12 years underscores the global price pressure

Chart: China Interest & Inflation: https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgxlqbvq/Pasted%20image%2016166060929088.png

4 / MEETING

High-level meetings will keep geopolitical issues boiling and keep the Turkish and Russian markets under scrutiny in the coming days.

On Monday (NASDAQ 🙂 The NATO summit will begin in Brussels, including a first face-to-face meeting between US President Joe Biden and his Turkish counterpart Tayyip Erdogan. On the agenda are Syria, Afghanistan and, according to a senior US official, “significant differences” with Ankara and Washington at odds on a variety of issues.

Biden met Russian President Vladimir Putin in Geneva on Wednesday for heated discussions with bitter disputes over election interference, cyberattacks, human rights and Ukraine.

-Biden and Putin meet in an 18th century Swiss villa for the summit

Graphic: The rising costs of geopolitics: https://fingfx.thomsonreuters.com/gfx/mkt/azgpooyyzpd/Russia%20Turkey%20CDS.PNG

5 / FLIGHTLESS GROWTH

Will the newly aggressive Reserve Bank of New Zealand beat its Q1 growth forecast? GDP lands on Thursday, and the central bank expects it to be negative, putting the country back into technical recession.

However, sub-indicators say this may not be the case. While the absence of foreign tourists is clearly noticeable, domestic consumption has been robust and raw material prices – especially milk and construction timber – have developed favorably.

A blow might not mean sustained strength, but a headline surprise would suggest an economy on more solid foundations than the RBNZ is appreciating.

– New Zealand production sales increase in the first quarter Chart: New Zealand economy is about to grow: https://fingfx.thomsonreuters.com/gfx/mkt/nmopaebmqpa/Pasted%20image%201623314971746.png

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