Inflationary pressures rising

Challenge will be to disentangle the genuine signal

Chart of the Day

While the prices paid component of the ISM services survey fell slightly, an average of the services and manufacturing indices still rose strongly. The last time an average of the two was this year, in 2011, inflation soon rose to almost 4%. Because many prices fell steeply in the spring last year, it’s a given we’ll see the annual rate of inflation increase in the spring this year. The big question is how much of that the upcoming rise in inflation is just a “base effect”, and how much is a sign of more genuine price pressures? We’ll find out soon enough…

Macro

The inflation data have also surprised in the eurozone - core inflation jumped to 1.4% in January, above where we might have expected based on inflation expectations. Part of the reason is the weights used to calculate the consumer price basket have been updated, so items with sharp falls in prices - like flights - now contribute less.

A weighted average of the employment components of the US ISM series is now close to 55.0, near where it was before the virus hit.

The ADP employment report showed a rise of 174,000, which was better than the consensus forecast but still confirms the labor market recovery is slow going. We’ll get the “real” labor data on Friday with the non-farm payrolls survey.

US banks have started to loosen lending standards to households again, but are still wary of lending to firms.

Markets

There have been some interesting moves in 3-month bill markets. In the US, the rate has dropped to the lowest since April, seemingly because the Treasury is set to unwind its huge cash balance, which means fewer bills will be issued in the coming months and more money will need to find a home. In Canada, the rate is also lower than in December, which some reports say is because traders are pricing in a further rate cut from the BoC. In the UK, traders appear to be moving away from their rate cut calls due to the country’s quick progress with vaccines.

Italy’s 10-year yield dropped back after ex-ECB head Mario Draghi was asked to form a government.

Little move in the S&P 500 yesterday, although energy stocks surged by over 4% - that was despite only a modest decline in crude inventories according to the weekly petroleum report.

The VIX is now back down to where it was before the “meme” stock sell-off last week.

Ethereum continues to surge, but bitcoin has yet to get back above its high from the start of the year.

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