The strong rise in inflation, which reached an overall 5% increase in May, and the figures for production price indices published yesterday showed that the upward pressure was maintained with a figure above what was expected, 0.8% in May, could lead to thinking about a change in future guidance, and about the beginning of the reduction of the bond purchase program. Any insinuation in this regard by the chairman of the Federal Reserve, Powell, would have an immediate impact on the price of the dollar, which remains with an upward bias for the moment and awaiting this afternoon's meeting. Also, the USD/JPY had exceeded in recent days the psychological barrier of 110.00.
Against this possibility is the lack of progress shown by the employment data with fragile advances and below what the market expected. The consumption data published yesterday on retail sales with a decrease of 1.3% in May added fuel to the fire.
The data suggests that the Fed waits for subsequent meetings. For the moment, it maintains its dovish speech, reiterating the idea that inflation will moderate as the year progresses and the base effects disappear. Along the same lines, the most advanced indicators of the cycle point to a particular ceiling in the growth rate after the substantial advances from lows levels experienced at the beginning of the pandemic.
The US Treasury bond market has behaved in this same sense, which did not react before the rise in the IPC and PPI data. On the contrary, it experienced falls in yields to a minimum of three months, anticipating that the Fed does not start to talk about the withdrawal of stimuli until their next meeting in August or until the end of 2021.
The market disregards the fact that the reduction of debt purchases will begin in 2022. The most optimistic stance is that the first-rate hike will start at the end of 2023, although the latest forward guidance from the Fed pointed to 2024 as the starting date.
One of the causes, perhaps the main one, that has influenced the rise in price indices has been the increase in prices of raw materials that have reached levels higher than the pre-crisis and, in some cases, such as COPPER being at historic highs.
China is the world's largest buyer of raw materials and has therefore been affected by this price increase. The authorities of this country expressed their discomfort at this movement, which they attributed to the excess of speculative positions in the futures markets. Yesterday the Chinese authorities ordered state-owned companies to limit their exposure to overseas commodity markets and control risks. All this without ruling out possible additional measures. The consequence is being reflected in copper, the primary industrial metal, which is experiencing, so far, the most significant weekly drop since the beginning of the pandemic crisis. Technically it is still an uptrend, and only below the area of around 4.0000 would there be a talk regarding the end of this type of movement. It should be noted that the behavior of this raw material is relevant in the market, not only because of its impact on price levels but also because of its positive correlation with the North American stock market indices.
Sources: Bloomberg.com, reuters.com
