Inflation uneasiness continues to grow
Summary
A surge in consumer prices dominated the market’s attention and escalated concerns that inflation could compel the Federal Reserve to raise interest rates sooner than anticipated. The 10-year Treasury climbed to 1.69% before retreating slightly at the end of the week. Colonial Pipeline resumed operations after a ransomware attack and buying panic spurred gasoline shortages across much of the Southeast.
Economic outlook
The market continued to digest the disappointing job numbers to start the week, with diverging opinions over the impact of additional federal unemployment insurance. Sixteen governors announced plans to eliminate the programs, while some economists cautioned the move was premature. On Wednesday, attention shifted to inflation as the Bureau of Labor Statistics released Consumer Price Index data for the month of April. CPI jumped 4.2%, exceeding expectations of 3.6% and outpacing a more modest 2.6% increase recorded in March. This spike represents the largest increase in any 12-month period since 2008. The April numbers intensified debate about whether the price increases will be transitory or constitute sustained inflation.
Historically low energy prices in 2020, a global semiconductor shortage, and seasonality factors all suggest some of the price changes could be temporary. However, the University of Michigan Survey of Consumers showed that inflation expectations were also on the rise, increasing 40 bps to 3.1% expected inflation over the next five years. Core CPI (which excludes food and energy) was also up 3% compared to the consensus expectation of 2.3%. Vice Chairman of the Federal Reserve Richard Clarida expressed surprise at the CPI numbers exceeding Fed forecasts during an appearance on Wednesday before reinforcing Fed guidance that there would need to be more persistent inflation before a hike in interest rates. The 10-year Treasury climbed after the CPI data was released to close at 1.69% before retreating slightly later in the week. Technology stocks drove equities down early in the week and then made a partial recovery on Thursday and Friday. Retail sales disappointed slightly but did little to dampen stocks.
Dollar slightly strengthens; Tesla reverses course on Bitcoin
The dollar appreciated marginally with the market pricing in potential higher rates to rein in inflation. USD-CAD was the major outlier as it approached six-year lows due to continued strength in commodities. As the U.S. dollar continues to fluctuate, many multinational corporations are wrestling with forecasting, monitoring, and communicating global performance. The cryptocurrency markets were once again a major source of debate and volatility after Elon Musk announced over Twitter that Tesla was reversing its policy on Bitcoin. The company scrapped plans to accept it as payment and announced they would not acquire any additional Bitcoin due to its environmental impacts.
(Related insight: Watch the on-demand webinar, "Data Driven Approaches to Managing FX Volatility")
Fuel shortages grip Southeast while commodities continue to surge
Colonial Pipeline resumed operations on Wednesday six days after a cyberattack forced it to shut down. Company officials warned it would take several days to return to normal for the nation’s largest pipeline that provides fuel to about 45% of the East Coast. The ransomware attack induced panic buying across the country, which only compounded the supply shortage as the national average price of a gallon of gas ticked above $3 for the first time since 2016. Government agencies relaxed regulations to address the supply shortfall but warned shortages could persist in some areas for the coming weeks. Prices continued to surge across a broad array of commodities, with tin and corn the latest to near all-time highs.
(Related insight: Read "Using commodity collars to manage market volatility")
Looking ahead
The market will look to the FOMC minutes released next Wednesday to glean more information on how the Fed anticipates handling inflation under the new framework. Initial jobless claims released on Thursday and existing home sale numbers on Friday will also be closely monitored.
About the author
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James Mallon
Analyst
Corporates | Kennett Square, PA
James is an analyst on Chatham’s Corporates Sector, specializing in foreign currency, interest rate, and commodity hedging analytics and strategy.
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