Large falls in retail energy prices are helping to drive US inflation down and last night we found out that US consumer prices fell 0.4 per cent in April to be 1.1 per cent higher annually, down from 1.5 per cent year-on-year. Notionally that’s a big drop and will get the Deflaitonistas all excited – except that energy prices fell more than 4 per cent in the month, and excluding energy, inflation is little changed, running at 1.7 per cent.
At that rate, the CPI is telling you that inflation certainly isn’t a major problem yet, but it isn’t low either – it's average. And average is higher than what was expected by all the deflation-disinflation hype. This idea that inflation is low though will have one very important implication. It will reduce substantially any idea that QE will be pulled in. Remember, it’s not just about growth and labour – inflation also needs to lift, and it isn’t lifting.
Now, last night we saw the head of the San Francisco Fed state that he was in favour of tapering QE perhaps as early as the US summer, in a couple of months – although he’s not yet convinced there has been a substantial improvement in the labour market. This view apparently weighed on markets.
Gold was down $12, the US 10-year bond yield initially pushed a few basis points higher to hit a peak of 1.95 per cent and stocks were weaker in the US. At the close the S&P500 fell 0.5 per cent (1650), the Dow lost 42 points (15,233) and the Nasdaq fell 0.2 per cent (3465). There is a bit of an inconsistency though, not only because of the ‘low’ inflation numbers last night, but also because the idea of the ‘swoon', or an economic lull, is back following the 16.5 per cent slump in housing starts, a dip in the Philly Fed index to -5 from 1 and a lift in jobless claims to 360,000 from 328,000.
So if the swoon is back and inflation is low, there is no chance that QE will be reined in, right? Which is good for stocks, right? The bond market even clicked and the rally came on from the peak, which saw the 10-year yield drop about 7 bps to 1.85 per cent.
Maybe it was that, or the realisation that the San Fran Fed President isn’t a voter – and remember that some of the big decision makers like Janet Yellen have said that even if there was a substantial improvement in the economy, QE may not be pulled. So with lower inflation (even if it is only temporary) and the swoon, it definitely won’t. At the very least the Fed will say something such as they want more time to see what the underlying trend is, or some such nonsense.
Anyway, a very confusing session to try and get some narrative out of, and European stocks were all flat as a result.
For price action elsewhere, the Australian dollar is down a further 35 pips form yesterday afternoon at 0.9808. The euro is 20 pips higher to 1.2882, the British pound is also about 20 pips higher while the yen is at 102.25.
In the commodities space crude was 0.9 per cent higher ($95.14) and copper rose 0.7 per cent.
Outside of that, the dataflow yesterday continued to show an acceleration in global growth, with Japanese GDP increasing at a decent clip in the March quarter – up 0.9 per cent (or 3.5 per cent annualised). The eurozone trade surplus rose to $18.7 billion, from $12.7 billion on a strong 2.8 per cent pick-up in exports, while imports rose 1 per cent. That’s about it though.
For today, the SPI suggests our market will be flattish (up 3 points to 5177) and there isn’t much in the way of data either. We'll get Chinese property prices around lunch time, while tonight we see Michigan University’s consumer confidence measure as well as a speech from Ben Bernanke.
Have a great weekend…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.