The Trader: “Where art thou, inflation?”

Just as Britain’s excess death level falls below the 5-year average for the first time in months, the EU is set to announce fresh rules to allow it to control vaccine exports. Officials are playing down the importance of it, saying it’s nought but a scrap of paper to let governments take action if required, but it smacks of protectionism and is not going to down well in Britain. Meanwhile after questions were raised by the US National Institute of Allergy and Infectious Diseases (NIAID), AstraZeneca said it will reissue vaccine data within 48 hours, saying that the numbers released Monday were based on a "prespecified interim analysis” with a cut-off date in mid-February. The all-seeing Dr Fauci said the press release from AstraZeneca could be misleading. Another blow to confidence, another PR nightmare for Astra, which has been dogged by doubters ever since it released its preliminary results for the vaccine last year. It’s a lesson in how, no matter how good you are, you need to be good at communicating this to people or they just won’t believe it. 

Suez crisis

Oil prices moved higher today after a massive container ship blocked the Suez Canal in both directions, which followed the sharp demand-driven fall on Tuesday amid doubts about the demand-led recovery from Europe this summer and another build in oil inventories. The API said crude oil stockpiles rose 2.9m barrels last week – EIA figures on tap later are expected to show a build of 1.4m barrels. 

Bitcoin enjoys another Musk boost

Bitcoin jumped above $56,300 from under $54,000 earlier this morning as Elon Musk shilled, I mean tweeted, about it again. It’s not a clear break and not that big a deal given how much Bitcoin moves around at these levels but there was a discernible sustained rally after Musk tweeted: “You can now buy a Tesla with Bitcoin. Tesla is using only internal & open source software & operates Bitcoin nodes directly. Bitcoin paid to Tesla will be retained as Bitcoin, not converted to fiat currency.”

Inflation, inflation, where art thou, inflation? 

European flash manufacturing and services PMIs show bullishness despite rising infection rates. I think this is interesting since although new restrictions in some of the major economies, businesses remain upbeat. The survey data was collected between 12-23 March, so it is very much up to date. Whilst compilers IHS Markit note that the outlook has deteriorated amid rising infection rates, business activity is strong, particularly in manufacturing. The flash Eurozone composite PMI rose to an 8-month high at 52.5, with a clear two-speed recovery evident with Services still in contraction territory at 48.8, albeit this was a 7-month high, whilst manufacturing hit a record high at 62.4. 

Inflation in the UK fell last month as cars, clothes and games dragged the consumer prices index (CPI) lower. CPI rose by 0.4 per cent in the 12 months to February 2021, down from 0.7 per cent to January 2020. As with the recent US data, this is going to be the last easy print ahead of the spring as base effects and –fingers crossed – cyclical recovery boost inflation readings. The pandemic has skewed a lot of the usual seasonal data so we need to be careful about reading too much into any one print. 

Fedspeak

On the tape today there are several Fed speakers, including Williams, Daly and Evans, as well as Jay Powell and Janet Yellen’s second day of testimony in Congress on the CARES Act. ECB chief Christine Lagarde is also due to speak. On the data front watch for the US flash manufacturing and services PMIs and durable goods orders. 

Powell and Yellen did their double act yesterday, delivering testimony to lawmakers about the economic response to the pandemic. It wasn’t quite Kris and Rita, but the way Treasury and Fed are in harmony is new. Full MMT? Not quite. Biden’ $3tn stimulus plans on top of the $1.9tn just launched - and all the stimulus last year - suggests the government just doesn’t care a heck of a lot about deficits. Except Yellen stressed that the $3tn economic plan would require tax hikes. Investors sat up, the Dow sold off in the afternoon after trading flat in the morning. What is unclear is the degree to which this could be debt-funded, and to what extent increasing taxes could amount to fiscal tightening (the idea is that it won’t as it will be targeted at those who exert the lowest marginal impact on spending, in other words, the rich). Powell said that the economic recovery from the pandemic had “progressed more quickly than generally expected and looks to be strengthening.” Yellen thinks the economy will be back to full employment next year.  

Fed governor Lael Brainard said the central bank will show “resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance” rather than taking “pre-emptive” action.

Dallas Fed president Robert Kaplan said he expects rates to back up further, but this would be a healthy signal and he would not want to get in the way. Kaplan also came out of the closet to say he was one of those on the FOMC calling for a rate hike in 2022 – hardly a surprise given he is one of the most hawkish members. Also worth noting he is not a voting member this year or next, so his hawkishness won’t have any real effect on Fed policy over the next 22 months. The Dallas Fed president also said: "the first step for withdrawing accommodation would be to reduce the Fed's asset purchases,” which matches our expectations that the Fed will seek to taper its $120bn bond buying programme before it looks to think about thinking about raising rates. If the current market positioning is right, this would indicate that the Fed may need to start the tapering wheels in motion as early as its June meeting. Kaplan reiterated the Fed’s central stance that inflation will rise this year but not be sustained, and that it’s good to do a lot now rather than waiting. And he suggested than anything to distort the yield curve any more than the Fed is already doing by its massive bond buying programme would be less helpful – ie no Twist.