If last weeks payrolls numbers let the market down last week, yesterday’s inflation number more than made up for things: The US Consumer Price Index came in way above expectations with a 4.2% increase in prices in April, versus a year ago and 0.8% higher than just one month before (used car sales prices jumped by 10% in that month!). The bigger than expected print had all the reactions that you’d expect with bond yields driving higher along with the dollar, whilst the stock market had a shocker and fell more than 2% (on news that they knew was inevitable!). The Fed have said that volatility in inflation will be here until at least September, the Treasury thinks until the end of the year as bottlenecks in supply take time to manage the overwhelming pent up demand.
The number isn’t what Joe Biden will have wanted to see, because it’s going to give some weight to the argument against pumping trillions more dollars into the economy through his build back better plan, as more money in the system would continue to add to inflation. So far Republicans have pushed back moderately hard on the plans but haven’t ruled anything out except tax rises, which they see as their red line – though without tax rises, financing the spending becomes more debt dependent and as that’s not fiscally prudent the Republicans may argue that they can’t even support slimmed down versions of each of the projects. Joe Biden has said that he wants to “know what we can agree on, and lets see if we can get an agreement to kick-start this, and then fight over what’s left, and see if I can get it done without Republicans if need be”.
On this side of the Pond: Andy Haldane has written a piece for the Daily Mail talking about the UK economy’s “tennis ball bounce” that could see us outperform every other G7 economy, including the US, this year and possibly see as many jobs created as were lost. Mr Haldane also makes his case for the need to dial back on central bank asset purchases, as inflation pressures will naturally start to grow and the Bank needs to start reigning in monetary policy now and doing it gently, rather than slamming the brakes on when inflation is too much of a problem. It’s a pretty good read, though you have to scroll past the pre-amble to get to his actual words.
There are still risks to the economy and its trajectory, and one more immediate than inflation might be the increasing circulation of the Indian variant of covid in pockets of the UK. Sage has called an emergency meeting to discuss the contagion, which is far quicker than any other of the ‘imported variants’ and this could mean that the fourth and final stage of restrictions easing could be delayed. Vaccine manufacturers have expressed confidence in the efficacy of their products against this strain, but there isn’t the large scale data available yet to be sure that this is the case. Number 10 are playing down the situation but would surely rather have an extension to the last steps rather than risk another lockdown further down the line, so it wouldn’t surprise us if we did see an air of caution and a minor Boris U-turn.
The housing market is on its most widespread winning run since at least the 90’s, according to the latest RICS survey. Data showed that 75% more surveyors across the country saw prices rise in the three months to April than saw them fall. Their survey of surveyors also showed an expectation of the trend continuing with almost half of the respondents seeing more enquiries in the month of April, despite available housing stock numbers not keeping pace with demand. The government has put planning reforms on its agenda for this year, which would give local authorities less say on a case by case basis as to what is built and may assign binding quotas to different regions in a bid to increase supply, particularly in areas where it is most needed.
Elsewhere: Elon Musk threw the cat amongst the crypto-pigeons yesterday when he tweeted that Tesla would stop accepting Bitcoin as payment for cars, until such time as the energy used to ‘mine’ the currency was predominantly renewable. Given that bitcoin miners work on all kinds of scales (from multiple joined up home PC’s to huge data centres) in all corners of the world, it’s incredibly difficult to quantify exactly what type of energy is being used and therefore how he works out what element is attributable to renewables is anyone’s guess – though he’s probably smart enough to figure it out. The dollar price of a coin fell by nearly 20% after the tweet, but has recovered slightly since.
Looking to today: The economic calendar is reasonably quiet, so it will be interesting to see if the markets use yesterday’s sell-off as an opportunity to buy back in and try and convince themselves that inflation isn’t a thing, or if the retreat continues as they start to take the accelerated pace of price rises more seriously.
If the lack of economic data means you have time on your hands, here’s the first video instalment of our WTFX podcast – this one is on the last 10 years of HCFX (and I’m the guy on the left!)