US Data and FOMC Preview – Inflation, not as transitory as it may seem.
Last week’s US inflation data came in higher than market expectations, rising by 0.6% m-o-m (5% y-o-y), with components related to re-opening and commodity inflation largely driving the beat. There are however some exceptions: the rise in prices for Rent and OER, which together comprise the largest share of CPI, may be a sign of more persistent inflation, even when the reopening spike in prices is over. Thus, not all the price strength can be dismissed. Yet, the muted reaction to the data demonstrates the market has gotten more comfortable with the idea that inflationary pressures are temporary, or at least that the Fed will continue to perceive them as such. Overall, last week’s CPI data doesn’t change our view of QE tapering to start in early 2022, with a ramp up in Fed guidance in the fall and a formal announcement at the December meeting. At this week’s FOMC meeting, we expect the Fed to maintain patient forward guidance on rates policy by holding its rate projections (“dot plot”) largely steady, even if we see the potential for upgrades to growth and inflation in the Summary of Economic Projections, albeit offset somewhat by a marginal downgrade to employment.
COVID-19 Vaccines – The G7 provides a lending hand.
The G7 are set to commit at least 1 billion coronavirus vaccine shots to nations struggling to contain the virus, with at least half of these doses will come from the US, and 100 million from the UK. The US will buy 500 million doses of Pfizer’s COVID-19 vaccine to donate to impoverished nations. The Pfizer doses will be provided to COVAX, an international partnership for distributing vaccines to low-income countries. We believe the donation represents a cornerstone of the U.S. effort to bring the global pandemic to an end, as well as to counter the influence of authoritarian countries like Russia and China, which were quicker to provide vaccines overseas. Overall, whilst this is an important step towards the global fight against COVID-19, the ~1 billion doses to be distributed still represent a relatively small number. Currently, the percentage of people vaccinated in Africa and Asia are 2.4% and 21%, respectively. This compares to 44% for the EU, 52% for the US and 61% for the UK.
ECB – Dovish tone into the summer lull.
The ECB delivered a dovish meeting, without changing the purchase pace of PEPP, nor the wording around it (“significantly higher pace than during the first months of the year “). Despite upgrades to inflation and growth estimates, the ECB didn’t change its view that inflationary pressure are transitory and justify no hawkish response. The next date to watch is September’s strategy review for changes to the inflation target, but the real question is when PEPP purchases will be unwound and how much bonds the ECB still buys in a post-Covid world. As long as they continue, and 100% of sovereign debt issuance is funded by the ECB, the ball lies in the field of governments to fuel the economy with fiscal spending. Nonetheless, as rates now retraced to February levels, and short-positioning in rates has generally been cleansed out, we think these lower yield levels, combined with the dovish ECB can be a re-entry point for curve steepeners into year-end.
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