The Case Against Inflation

In this week's Macro Insight I discussed...

Risk assets had a wobble last week after the crypto market almost halved in 24 hours and impacted broad risk sentiment. Equities however, were able to recover fairly quickly as we moved back higher into monthly options expiry and the VIX mean reverted back below 20.

Bond yields remain rangebound trading at 1.60 in US 10Y as markets become more comfortable with the idea that inflation may be transitory after all. FED’s Brainard gave dovish comments saying inflation was well anchored allowing policy to remain loose to support the recovery.

Excessive commodity speculation driving prices higher whilst the Chinese economy is deleveraging puts doubt on the "commodity super cycle" narrative. Korean and Taiwanese exports at records highs with large container ships waiting to be unloaded at major US ports signals the supply chain constraints may be over sooner rather than later. Fiscal stimulus ending in Autumn slowing demand and low velocity of money due to massive debt burdens will make it hard for inflation to stay high. Finally, wage increases along with higher productivity don’t necessarily have to lead to inflation. Last year was the best year for productivity growth in a decade.

European markets remain bullish along with a strong EUR as reopening continues. China stocks finally stage a rally as downside momentum seemed exhausted.

As we approach long term supports in DXY around 88/89 the dollar seems to losing downside momentum and may be ripe for a bounce soon. We see USDCAD as a potential way to play the bounce due to very oversold levels.

Oil had a pullback on news that Iran may be able to get sanctions lifted if they were to reach a Nuclear deal, and so we could see a supply increase. This was short-lived as markets priced in either the deal is unlikely or the marginal new supply will not be that significant as Iranian oil already finds its way to China and many other Oil importing countries. Gold has been stable after the recent push above 1860, waiting for real yields to give it some direction. Other commodities correct lower on the back of China attempts to curb speculation. We prefer Copper to Grains as the supply/demand story seems more robust there.

Filmed on on Tuesday 25th May 2021.


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