Source: Federal Reserve Bank of St. Louis

A concise summary of what’s moving markets, the impact on base, precious and ferrous markets, including Theme of the Day.

What’s moving markets?

• Global equities moved into the green ending a 3-day losing streak as investors try to shrug off inflation and interest rate concerns and focus on prospects of a strong economic recovery. Initial jobless claims dropped to 473K last week, a new pre-pandemic low and better than forecasts of 490K. Meanwhile, producer prices went up 0.6%, more than expectations of 0.3% and adding to worries over inflation. The yield on the 10-year Treasury note fell 3bp to 1.66% as the USD was steady. China told markets they are capable of dealing with the issue of surging commodity prices, with trading limits, higher margin on futures contracts, and increased transaction fees being imposed.
• The producer price index in the US rose 0.6% month on month in April and up 6.2% from the same period a year ago, the labour department said, when prices were depressed by coronavirus-driven lockdowns. That exceeded economists’ expectations for a 5.9% annual increase. The report also showed so-called core producer prices, which strip out volatile items such as food and energy, rose 0.7% in April from the previous month and 4.1% from a year ago, exceeding economists’ expectations.
• Gold edged up toward $1,830, after dropping more than 1% from a three-month peak in the previous session, after latest data showed US producer prices went up 0.6%, above market expectations. Other Fed officials, including Brainard, Mester and Bullard all said that while the outlook is bright, risks remain. This should see interest rates remain near zero for the foreseeable future, and support investor demand in gold. Aside from economic headlines, gold continues to benefit from safe-haven demand stemming from the ongoing coronavirus crises as infection rates continue to accelerate in India. Silver followed gold higher but the PGMs were more hesitant though as the USD was firmer.
• Selling continued on the LME yesterday, leading to lower prices at the close, after higher-than-expected inflation readings from the US triggered concerns of interest-rate increases and amid a firmer USD. Constraints on China’s aluminium output, due to power generation and environmental issues, along with the potential for strikes in Chile and reduced copper output in China, due to low treatment/refining charges, are underpinning copper and aluminium. Nickel took the brunt of the selling on news Nornickel’s Oktyabrsky mine was back to full production after the February flooding. With equities showing weakness on the back of raised inflation concerns it is not surprising that industrial metals are on the back foot. The metals have not had much of a correction to speak of, so we should now get an update on how bullish underlying sentiment really is, by seeing how far prices pull back and for how long. So far, any corrections have proved both shallow and short-lived.
• Iron ore remained resilient on robust demand and a shortfall in supply. The market shrugged off the fall in aggregate financing in China, as both physical buyers and investors were not wanting to be caught short with the rally appearing to accelerate.

Theme of the Day: The inflation shock ripples through markets

• Global stocks suffered their worst losses in months while US government bonds also fell after data showed the US inflation rate jumped to a 13-year high, heightening concerns that the Fed will be forced to tighten monetary policy. Investors are worried over how transitory the jump in inflation will be. Despite the market jitters over the CPI data, Fed policymakers have regularly said they would allow inflation to overshoot the central bank’s 2% target to allow time for the pandemic-scarred labour market to recover. Richard Clarida, Fed vice-chair, said he expected price rises to exceed the target for “the next few months” because of “transitory factors” such as bottlenecks in global supply chains caused by industry shutdowns a year ago, as reported by the Financial Times.
• Data showed consumer prices in the US advanced 4.2% in April, YoY, the most rapid price increase since 2008 and higher than analysts’ expectations of a 3.6% gain. Core inflation, which strips out changes in energy and food prices, rose 0.9% in April from March, the largest monthly increase since 1982, according to the US labour department. Prices rose for used cars, furniture, and rental accommodation along with airline tickets and leisure activities Used car prices have risen 20% in the first four months of 2021 as US car production is compressed due to a shortage of semiconductors. It can also be argued that the overshoot in inflation can almost entirely be attributed to the economic reopening. Even the surging price of used cars is related to reopening because the heavy buyers are car rental companies that need to restock their fleet. Rising rental costs, reflecting the 12% rise in house prices YoY are yet to filter into the data numbers. So, there is plenty of potential for the CPI to rise further.
• Last summer, the Fed spelled out its new framework where it established that it wants to see sustained inflation above recent trends before it would consider hiking. It also wants to see a sustained, tight labour market that benefits wide swathes of the population. By focusing on the destination as opposed to the path, it has relieved itself of trying to navigate the data in real time and come up with “The Right Answer”.