Post date: 20/05/2021 9:29

Risk assets worldwide are hanging on near all-time highs, but are looking wobblier after a week that saw the inflation surprise in the US we had been warning about for some time. Considering the scale of the surprise, it’s somewhat surprising that US 10-year Treasury rates only rose by 0.04%. Nevertheless, this move was enough to upend commodity markets and sent some ripples through emerging market currencies, which ended the week mostly if not uniformly down against the US dollar.

This week, the minutes of the Federal Reserve meeting will be published on Wednesday. We expect the market to largely ignore them as the inflation surprise means they are somewhat out-of-date. The preliminary PMIs of economic activity for the US, Eurozone and the UK all come out Friday, in what we expect to be the main event of the week for markets. Beyond data and policy, the market seems to still be digesting the dramatic increase in at least short-term inflationary pressures in the US. We think that, once it does, the path of least resistance for the greenback will continue to be down.


Relief about the outcome of the Scottish elections and the lack of prospects for a renewed push for independence was reinforced by a spate of very positive reports on housing prices, monthly GDP for March and BRC retail sales. Sterling soared last week, ending the week higher against every major G10 and emerging market currency worldwide. This week, in addition to the always key preliminary PMI activity numbers for May on Friday, we look forward to the inflation report on Wednesday. Markets are expecting a modest rebound in the core number. It will be interesting to see whether the massive surprise in inflation we saw last week is a worldwide phenomenon or remains for now limited to the US.


Investor confidence numbers in the Eurozone last week confirmed the turn to the better in European expectations and leading economic indicators generally. We think one of the key financial and economic factors for 2021 will be how the Eurozone bounce back compares to the US one, both in terms of speed and the accompanying inflationary pressures. Due to data lags, we will not have a clear picture until midsummer, however. For now, we will focus on the leading indicators of economic activity such as the PMI indices out Friday. Another positive surprise in the services index could provide a late-week boost to the euro.


The long anticipated increase in inflation in the US burst into full view last week. Headline inflation is running at 4.2% on the year ended in April. More ominously, the steadier core index that strips out volatile food and energy components experienced the biggest jump since 1981; the three-month annualised rate is now running at almost 5%. The key now will be the reaction from the Federal Reserve. While they have been making dovish sounds about looking past short-term price pressures and keeping policy at extremely stimulative settings, it is possible some members may have been rattled by the burst in inflation. As for currency markets, very low rates and rising inflation has seldom been a positive mix for any currency, and we do not expect it to be different this time.