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Reflation rotation reverses

Tesla, man and machine

Markets shifted into reverse gear in overnight trading, unwinding recent moves. Re-opening related stocks fell as tech and other Covid winners rallied. Bond yields fell, dragging the US dollar lower for the first time in a week. Growth exposed industrial commodities snapped their winning streak, gold lifted over $1,700 and commodity cryptocurrencies jumped as central bank jawboning appeared to bite.

Reserve Bank of Australia governor Phil Lowe re-iterated the global central bank view in a speech this morning. The huge sell-off in bond markets over the last two months reflects fears that inflationary pressures come with the enormous economic growth expected this year, potentially forcing cash rates higher. Governor Lowe sang from the same song sheet as the US Federal Reserve, the European Central Bank and the US Treasury Secretary when he expressed the RBA view that cash rates will not rise until 2024.

This will not be the end of the matter. It’s possible the conflicting impacts of higher growth and inflation risks will dominate the market conversation for most of 2021. Unfortunately for the reserve bankers attempting to calm sentiment there are potential catalysts on the immediate horizon.

Near the mid-point of today’s Asia Pacific trading session China will release February inflation data. A 1.5% lift in producer prices is the consensus forecast, although it is expected that consumer prices fell by 0.4%. Surprisingly strong China trade data released over the weekend could mean the risk is inflation is hotter than estimated. If this is the case, market sentiment could shift sharply.

Similarly, tonight brings US CPI data. Although the Fed’s preferred measure of inflation is the PCE deflator component of the national accounts, any surprises in the core CPI (ex food and energy, forecast 1.4%) will likely have high impact. The better than expected employment conditions reported on Friday night heighten the risk.

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