Inflation panic

Several reasons have been offered for sterling’s class-leading performance on Monday: the Conservatives’ success in Hartlepool and the local elections; the Scottish National Party’s failure to secure an overall majority; the anticipation of being able to hug people; a record high for house prices. Whichever it was, the pound strengthened by an average of 0.9%, with no losses.

As sterling was building its lead, and for wholly different reasons, equity prices were falling. The received wisdom is that investors are concerned that the US consumer price index data tomorrow will put the headline rate of inflation at 3.6% in April. That would represent a one-percentage-point increase on the March figure of 2.6% or, more provocatively, a 38.5% jump on the month.

Despite the repeated reassurances of Federal Reserve Chairman Jerome Powell, investors worry that a big number this week – and even higher readings coming down the track – might precipitate the Fed into tightening monetary policy. It is unclear why everybody chose this Monday to panic about something they had known about for ages. But panic they did, and tech shares were the biggest losers because they are most reliant on cheap/free central bank money.

Inflation underlined

Hard on the heels of Monday’s equity declines in North America, Asia-Pacific markets followed suit this morning. The situation there was not helped by evidence that Chinese inflation is on the rise. Data this morning put headline CPI inflation at 1%. Producer prices – factory gate prices – were rather more startling, up 6.6% on the year.

The relevance here is that there is an assumption that where Chinese prices lead, global inflation will follow. In particular, the widely-reported semiconductor shortage is expected to mean higher prices everywhere for computer chips.

In exchange rate terms, the inflation alarm generated more heat than light. Seven eighths of a cent behind sterling, the Canadian dollar took second place, a nose ahead of the Swiss franc. Closely behind the CHF the JPY and USD shared fourth place. The EUR was on average unchanged, having lost nearly a cent to the pound. The antipodean dollars and the Northern Scandinavian crowns were at the back of the field, down by between 0.1% and 0.6%.

It all happens tomorrow

Once again today’s global ecostat agenda is a bit of a wasteland, potentially enlivened only by a couple of central banker appearances including the Bank of England’s Andrew Bailey. The important numbers, at least for sterling, come in a rush before London opens on Wednesday.

This morning, New Zealand reported that electronic card transactions, a quick and loose measure of retail sales, were up by a monthly 4% in April and a mighty 108.7% higher than in the same (locked down) month last year. It was a similar but less spectacular story for Britain’s BRC retail sales, which were up by an annual 39.6%. Data later today cover ZEW’s German and Eurozone investor sentiment and US small company business confidence. Tonight brings Australian new home sales and consumer confidence and NZ house prices.

At 0700h on Wednesday the Office for National Statistics will release a deluge of UK data. They will cover the balance of trade, manufacturing and industrial production, gross domestic product and business investment. At the same time Norway will report on GDP and Germany on inflation.