Macklem Vs. Powell Vs. Orr
Ashraf Laidi | Jul 15, 2021 01:10AM ET
by Adam Button
Yesterday, the RBNZ signalled it will end QE (fully tapers) this month. Then Powell's prepared speech indicated inflation is well below the level requiring tapering. Then Bank of Canada's Macklem announced Canada's 2nd tapering of the year. Yesterday, a Fed official brushed off a high CPI print but after a weak bond auction, the market took notice. The US dollar is down across the board, with the kiwi leading the pack.
US June CPI rose 5.4% compared to 4.9% y/y expected in the largest rise since 2008. Core and monthly numbers were similarly strong and the initial reaction in the market was a higher dollar.
As the minutes ticked by though, the dollar strength began to fade. Part of that was market participants picking apart the report. The jump in used car prices is undoubtedly transitory. They rose another 10% in June for a 45% y/y increase – a shocking number no doubt but that rise won't continue and there are already signs that used cars will be a drag on CPI in the months ahead.
There were other quirks too, including energy and some durable goods. In all, 6 items accounted for 55% of the increase in June. As that was digested, the US dollar gave back its gains, even completing the round trip against the pound, kiwi and aussie.
There are lingering concerns though. Rent inflation has risen in consecutive months in what could be a long-term tailwind for inflation.
The dollar got a second lift on a 30-year bond auction. The yield at 2.000% was much higher than 1.976% expected and that triggered a second rally in the dollar and a continued selloff in bonds that pushed 30's to 2.05%.
The price action looks a bit like bonds reversing the recent gains or pricing in higher inflation. As yields ticked up, stocks also ticked lower.
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