Yesterday markets were perhaps as non-directional as they have been in a long time. Usually, the set of expectations moving into an important event or data release is well defined and it’s possible to place your finger on exactly how the market should react to certain tangible outcomes from such events. The present environment is different given the seismic shift expected in the economy. The market has been inflation mad, hunting for signs of either real inflation and growth or comments by officials confirming its imminent arrival. Yesterday, however, the market brushed off the biggest inflation above-consensus reading in a decade and one of the highest year-on-year readings in recent history.
Expectations in the market ranged from depictions of Armageddon if inflation was shown to be running above expectations to apathy. On the one hand you’re comparing the price level in major economies today with a point in time where global lockdowns drove economic activity towards levels of output not seen since the 1700s. Of course there are going to be measurement issues as panic buying and supply chain collapses created unfamiliar currents within the basket of goods measured within the consumer price index. Inflation sceptics therefore use this complication to down-play the result of inflation data. On the other hand, the changing price level in this time period is one of the most telling and observable factors of just how far, or how far still to go, nations have come in the bounce back from the pandemic.
It seems the question marks over the relevance of yesterday’s data and it’s importance undermined any significant reaction in the market. Let’s take a look at what happened:
Yesterday at 13:30 UK time the latest observations of US inflation via the Consumer Price Index were released. Standing above consensus forecast of 3.6% year-on-year for April, was the top economist surveyed at 3.9%. Towering above this again was the official observation: 4.2% price increase in consumer prices in the 12 months to April in the United States. Bid-ask spreads widened across the market with the net movement being in favour of USD with yields on US debt rising across the curve to reflect possible Federal Reserve action. This price movement lasted only half an hour or so before eroding and resting around pre-release levels on the majority of assets affected by the above-forecast data.
Whether the Fed’s rhetoric of lower rates for longer or traders’ combined impressions of the data’s significance are the cause of no ado about something, inflation clearly has been stirring in the US economy intrapandemic. The market will be watching the Fed’s commentary for changes to its forecasts in this inflationary environment.
Discussion and Analysis by Charles Porter