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Saturday 17th July 2021
Hi Friend,
Central Bankers Under Pressure ...
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| As Inflation Levels Rise ...
Central Bankers came under increased pressure this week as inflation levels continue to rise. Jerome Powell, Chair of the Federal Reserve admits to being "uncomfortable" about the level of price increases.
“This is a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2%. We’re not comfortable with that,” Mr. Powell told the Senate Banking Committee on Thursday. CPI Inflation hit 5.4% in June.
Fed officials are set to continue discussions at the July 27-28 meeting over how and when to gradually pare their purchases of $120 billion a month in Treasury and mortgage securities. The Prospects of tapering and rate rises, failed to impress markets. US Ten Year Bond yields closed down at 1.31.
Some suggest Larry Summers, former US Secretary of State, could be right. He predicted there would be a one in three chance of the high inflation the U.S. saw in the 1970s. He also said there would be a one in three chance the Fed would have to quickly hike interest rates in response to inflation, stifling price increases and causing a recession. He assigned the final one in three probability that everything would work out just fine — fast growth without problematic levels of inflation.
Could he be right? Or rather how could he be wrong. The Summers play, is an each way bet on every runner in the race. The smart money is on the third option. Steady growth with inflation returning towards peg into 2022. Trapped on Planet ZIRP, the Fed can but do otherwise. |
| UK Inflation Hits 2.5% in June
In the U.K. inflation CPI basis increased to 2.5% in June, the Bank expects levels to rise to 3% before returning towards the 2% target later this year. Not all members of the MPC are in agreement.
Dave Ramsden thinks inflation could hit 4% before falling back to target. He thinks conditions are such, a tightening in policy may be required somewhat sooner than he had previously expected.
Michael Saunders, in his "Inflation Outlook Speech" this week, explained, "In my view, if inflation indicators remain in line with recent trends, it may become appropriate fairly soon, to withdraw some of the current monetary stimulus.
In this case, options might include curtailing the current asset purchase program – ending it in the next month or two, before the full $150 billion has been purchased – and/or further monetary policy action next year."
Markets were unimpressed. Ten year gilt yields closed lower at just 63 basis points. The Pound closed lower at $1.3785. On the duck ponds of Planet ZIRP, the ducks are quacking but have yet to realize they are long since pinioned and incapable of flight. The Chancellor still has need of the £1 trillion bank note.
For lovers of detail, inflation CPI basis jumped to 2.5% in June. CPI(g) goods inflation increased to 2.8% from 2.3% prior month. CPI(s) Service Sector inflation closed at 2.1% from 1.9%. Manufacturing output prices slowed to 4.3% from 4.4%. Manufacturing input costs eased to 9.1% from 10.4%. Oil prices and metal prices featured in the underlying cost pressures.
Input costs may have peaked In May. The pass through rates are roughly 50% from input prices to output prices. The pass through rates are roughly 70% from output prices to CPI goods. The process offers a three month lag. CPI(g) accounts for roughly 50% of the total CPI index. That's why we expect inflation to hit the 3% level in the next few months, peaking in August, easing to 2.5% perhaps by the end of the year.
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| What Next For Oil ...
Oil prices have peaked according to CNBC's Jim Cramer. Calling the top "right here" for oil, "the hottest trade of the year is over". Time for fundamentals to come into play. He
believes U.S. companies will begin to bring production back online.
This jump in supply comes on the heels of OPEC and its
oil-producing allies reportedly nearing a deal that would also boost
production.
In the July Short-Term Energy Outlook, the EIA forecast Brent crude oil price will average $73/b in the third quarter of 2021 and will fall to average $71/b in the fourth quarter. Brent crude oil price is expected to average $67/b in 2022.
Brent Crude closed the week down $2 this week at $73.65. For inflation fears to abate, we look for the
drop below $70 dollars to provide significant reassurance. In the meantime in
the Fed we trust, inflation will subside and the age of the
magic money tree will continue to flourish in the rich forests of Planet
ZIRP ...
Our Inflation Models and Chart Book and our updated Labour Market Charts are available to Premium Subscribers. My thanks to all of our new subscribers in July, your support is invaluable to us ...
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| That's all for this week, we will be back with more next week.
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John
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