Week Ahead – Inflation scare shakes markets, European PMIs next

Concerns around cheap money policies being dialed back later this year came back to haunt markets lately, after a scorching hot inflation print out of America. Much of this spike comes down to base effects after last year's collapse, but even stripping those out, inflation is still rising at an alarming clip as booming demand meets supply shortages and sizzling commodity prices.

The Fed has been adamant that this inflation episode is supply-driven and won't last long, so monetary policy shouldn't react to it. That said, even the most confident policymaker must have been shocked after this week's data. Markets were stunned too and wasted no time in bringing forward the timeline for normalization. Eurodollar futures contracts now imply an almost 80% chance for a rate increase by December next year.

Taking a step back though, not much has changed. Inflation might be firing up but the labor market still has a long way to go. We had a massively disappointing jobs report and then an exceptionally strong inflation print, which might cancel each other out in the Fed's eyes. The endgame is still the Fed scaling back its QE program and ultimately raising rates, but we are unlikely to get any concrete signals on that during the summer.

In an environment where the Fed, Bank of England, and Bank of Canada start moving away from loose policies, the yen could be among the biggest losers as yield differentials widen to its detriment. The fact that Japan lags the developed world in vaccinations argues in the same direction. Outside of a massive unforeseen shock that sparks panic in global markets, there isn't much that can rescue the yen.

Speaking of Canada, inflation data for April are out on Wednesday. The loonie has gone on a rampage lately as the BoC started to scale back its QE program. With the economy doing well, oil prices being elevated, and some benefits from the gargantuan US stimulus packages likely to spill over into Canada, the outlook remains encouraging. The BoC Governor tried to talk down the currency lately, but outside of jawboning, there isn't much the Bank can do.

Finally, Australia's employment numbers for April will be released on Thursday, ahead of PMIs for May on Friday.