Looking through some intraday volatility, longer dated US yields and Bunds have traded sideways this week. European rates are finding themselves in a fragile limbo with inflation and ECB at the centre of the equation. We may have seen the first signs that the commodity boom is wearing off with both industrial metals and lumber prices heading lower. Chinese steps to put a lid on the move in industrial commodity prices is one reason, see Reuters. Reopening economies will also gradually substitute private demand back towards services but lack of raw materials is likely to be a theme for a while.
Lack of raw materials continues to show in German PMIs, as a growing number of manufacturing companies attributes lower output to supply disruptions and prices are rising at the quickest rates on record with also services firms showing a growing willingness to increase charges. Overall activity remained high, though, at 64.0 down from 66.2 in April. Supply shortages also continues to be a factor in the French manufacturing sector.
This week, the EU reached a truce with the US on metal tariffs. Under the agreement the EU will refrain from increasing tariffs to 50% (originally scheduled for 1 June) and both sides will engage in a dialog about overcapacity in the steel industry. After the EU and US already earlier agreed to suspend tariffs on their Airbus-Boeing subsidy dispute, the deal points to a further rebuilding of trade ties under the new US administration.
We got some rather weak figures out of Asia with particularly Chinese retail sales disappointing in April. Industrial production also came in slightly on the weak side. That said, data is hard to interpret currently due to base effects and overall consumption should show decent growth although there may still be some hesitancy to spend given the uncertainty around COVID. In Japan Q1 GDP declined 1.5%, and with a big part of the economy currently in a “state of emergency”, May service PMI declined to 45.7 and thus Q2 is not likely to give much of a bounce back. The commodity boom does not seem to bite on consumer inflation in Japan with headline inflation unchanged at just -0.1% in April as declining cell phone fees outweighed price rises on energy.
Last week, US CPI inflation ticked in much higher than anticipated, a third of which was due to a 10% increase in used car prices. This week, the FOMC minutes from the April meeting told us that the Fed may only be a few meetings away from starting discussing “a plan for adjusting the pace of asset purchases”, assuming the economy continues to make rapid progress.
Looking at next week, in the US we get PCE inflation figures which should not be a big market mover as they will likely just mirror the big increase we got in the CPI figures. It will be interesting to see whether service consumption has increased relative to goods, though as we also get consumption data. We will also be listening in on Fed speakers but we do not expect any change in views here. We still expect a shift in rhetoric at the September meeting, as the Fed by then will have seen several (in our view strong) jobs reports. In the euro area, we will look out for German ifo numbers taking another leap higher as the ZEW index indicates. At our own summit, we will look out for any clues on the future ECB policy direction when ECB’s Villeroy speaks.
