As year-on-year and month-on-month numbers have produced some elevated CPI prints both in the US and in the UK, it is not surprising that there are worries about inflation.
US inflation rising at its fastest rate since 2008 and UK CPI doubling month-on-month makes for plenty of headlines. Whether it is McDonald’s workers receiving a 10% pay rise or junior bankers receiving retention bonuses, there is certainly upward pressure on wage inflation. Commodity prices haven’t helped (and the likes of crude futures expiring at negative $35bbl last year doesn’t help either), and it is intriguing that surging lumber prices have added $24,000 to the average price of a new home for Americans. Sovereign yields have been fairly stable in the face of these numbers, in the context of Q1’s sharp moves, but more volatility in longer duration assets looks likely.
US President Biden remains busy although not necessarily in a frantic rush to reverse some of the protectionist measures put in place by his predecessor (now in deep trouble with US investigators). Proposing a global rate of corporation tax might have some merit but suggesting at this stage to nationalise the IP and patents of pharmaceutical companies does not. Federal Reserve officials are busy too, promoting the lower for longer message and a weaker than expected jobs report was timely. ECB President, Christine Lagarde, continues to insist that it is ‘way too early to think about long term policy’.
The MPC remained unchanged at 0.1% and but sounding more hawkish as the Bank of England sharply upgraded inflation, GDP and employment forecasts while tapering the scale of its current programme of asset purchases to £100 billion from £150 billion. It still appears likely that the timescale for a hiking cycle to begin won’t be until 2023 but these timescales are all subject to change and there is no room for complacency.
Credit spreads, however, remain near to recent tights and the appetite for credit unabated in all currencies. This was evidenced recently by Amazon further bloating its balance sheet with cash by coming to market with an $18.5 billion 8-part multi tranche. All tranches were heavily oversubscribed and priced well inside of initial price targets although why investors want to lend the company money for 20 years at +70bp (a new record) or for 40 years at 95bp over US Treasuries is baffling.