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Transitory, transitory…

Banging the drum

Central bankers are once again hoping to persuade investors and consumers alike that inflation is nothing to worry about. Bank of England Governor Andrew Bailey and half the Federal Reserve first team were out banging that drum again on Monday.

The Governor was talking to Parliament’s Treasury Committee about monetary policy. Although MPs were more concerned about possible financial malfeasance at GFG and Greensill Capital, Mr Bailey still found time to describe the recent upturn in inflation as “transitory”.

Across the Pond, Federal Reserve leaders were offering the same narrative. Lael Brainard, Raphael Bostic and James Bullard all downplayed the possibility of long-term price increases. In the immediate future, however, “they would not be surprised to see bottlenecks and supply shortages push prices up in coming months as the pandemic recedes and pent-up customer demand is unleashed”. A counterpoint to this studied relaxation came yesterday from Mohamed El-Erian, an ex-fund-manager and Cambridge don. He believes that the Fed “may now consider embarking on a policy correction” to avoid having to make a more dramatic adjustment at a later date.

 

A ripple-free day

There was one other central banker on the prowl; Bank of Japan Governor Haruhiko Kuroda. He seemed to side with the low-rates-forever strategy embraced by the Fed. But, apart from his relatively innocuous comments, the only event on London’s economic calendar was the Chicago Fed’s National Activity Index.

As the head of a central bank that has maintained a sub-1% benchmark interest rate for a quarter of a century, and pioneered the modern use of quantitative easing, it did not come as a surprise that Kuroda San took a dovish line yesterday. He seemed to find more reasons to keep monetary policy relaxed than to normalise it. The yen was on average fractionally lower on the day, while the US dollar lost an average of 0.3%.

The Chicago Fed’s National Activity Index softened from 1.71 to 0.24 in April, a level still towards the top of its long-term range. Data released ahead of London’s opening today put UK public sector borrowing at just under £40 billion for April. It was considerably more than expected but had no coherent effect on the pound, which lost ground to the euro and rose against the US dollar. The euro’s gain came despite worse-than-expected German GDP data released at the same time. Germany’s economy shrank by a revised 1.8% in the first quarter and by 3.1% in the year to end-March.

 

US homes

Today’s agenda is only a little more interesting than Monday’s. There are two sets of European statistics and five from the United States. The Reserve Bank of New Zealand is likely to keep monetary policy unchanged when it announces its decision tonight.

Swedish producer prices this morning have even less potential to move exchange rates than the German business confidence numbers which follow. After lunch the Federal Housing Finance Agency and S&P report on US house prices while the US Census Bureau reveals April’s new home sales. The Conference Board’s measure of US Consumer confidence ends the US day.

Apart from Australian construction output, tonight is all about New Zealand. The trade figures for April come out ahead of the RBNZ’s monetary policy statement and Governor Adrian Orr’s press conference. The Official Cash Rate is expected to remain at 0.25%.

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