Signs of a strong recovery in April have led to very high expectations. There are even signs of overheating. Inflation has emerged as the most discussed topic towards the end of May.
These discussions start in the United States, where several factors point to a return to higher prices. The Fed is finding it increasingly difficult to justify its analysis that these upward pressures would only be transitory. With these assertions, it is at least committing itself not to endanger the recovery by tightening monetary policy too quickly. However, its Beige Book also points to problems in the supply chain. Overall, it notes a moderate increase in selling prices, while production costs have risen more sharply. Nevertheless, companies are able to pass on these costs to consumers. This shows the strength of the ongoing recovery. But these adjustments are supporting the price increase.
Remaining patient pays off
The labour market is also in a state of shortage in the US. To find workers, there is little choice but to raise wages. However, there is no noticeable surge. Companies know how to be patient. For demand and supply should rebalance with the progress of vaccination and the decline in Covid-19 infections bringing workers back into the market. Nevertheless, the US housing market is reminiscent of the situation before the 2007/8 financial crisis. Sales prices have sometimes risen sharply, while supply is far from having recovered to pre-pandemic levels. Here too, patience may solve the problem: construction was at a low level after the pandemic, exacerbating the shortage. This activity is beginning to recover.
Oil and Gold on the rise
Oil is participating in the upward movement. OPEC confirmed its timetable for gradually lifting its production limits. Despite these additional volumes, oil has reached its highest level in two years.
Often seen as a hedge against inflation, gold enjoyed strong demand in May. The ounce can once again look forward to $2,000, also because the flaws discovered within crypto-currencies prevent them from being considered as serious alternatives to the yellow metal.
The bond markets are rather reassuring. In May, the yield on 10-year Treasury bonds did not rise. On the contrary, after the sharp rise in the first quarter, it has levelled off since April. Anticipating tightening is no longer on the agenda, also thanks to the Fed’s speech.
Contagious inflation?
However, the debate is beginning to spread to other regions of the world as well. The main question is whether price increases in the US can be passed on to other markets. This question is all the more legitimate as some of the driving factors are global. This is particularly true for raw materials and supply chains. The Baltic Dry index, which reflects the evolution of transport costs, reached a five-year high in May!
For the eurozone, however, the ECB is taking a similar stance to that of the Fed. At most, it will discuss the size of its regular bond buybacks. The current more favourable dynamics in Europe are reflected in an appreciation of the euro against the US dollar.
Several PMI indices still at good level
The purchasing managers’ indices rose again. The score for US industry reached 62.5 points (+1.6 points). The jump was even more pronounced in the services sector: 70.4 points (+5.7) is the highest value ever achieved since the index began in 2009. The eurozone’s advantage is reflected in these indices, as the score for industry rose to 63.1 points. Services remain more hesitant, with 55.2 points (+0.1 point). But despite the slowdowns imposed by the health measures, this score is the highest since June 2018, thus well before the Covid-19 pandemic. Despite a few grey areas, optimism remains high.
