Australian dollar jumps on US inflation bust

Forex finally got what it was asking for: lot’s of US inflation. But, as expected it was a bust for markets that have long priced it. They are now moving quickly towards the MB position of disinflationary shock. DXY and EUR barely moved:

The Australian dollar remained thoroughly rangebound as well:

Gold and oil lifted:

Base metals were weak:

Big miners too:

EM stocks went nowhere:

The dash for trash is on again:

US yields went shimmy, shimmy, whoosh:

The value trade reversed into growth:

All as expected. Westpac has the data wrap:

Event Wrap

US CPI rose in May 0.6%m/m and 5.0%y/y (vs. est. +0.5%m/m and +4.7%y/y), with core rising 0.7%m/m and 3.8%y/y (est. +0.5%m/m, +3.5%y/y). However, the details showed that the majority of the rise was due to a second consecutive month of sharp gains in used vehicle prices (rising 7.3%m/m in May after +10.0%m/m in April), such gains likely to be transitory bucket.

The ECB left all of its policy settings unchanged, as was widely expected. Increases in growth forecasts and a more balanced assessment were also expected to some extent. Medium term inflation projections were unchanged, though (1.4% in 2023), and remain well below the ECB’s target of 2%, indicating that policy will remain accommodative for some time.

Event Outlook

New Zealand: The strong trend is set to continue in the May update of the manufacturing PMI.

US: The Uni. Of Michigan consumer sentiment survey is expected to reflect the ongoing economic recovery, rising further to 84.2 in June.

Yes, US inflation popped higher than expected, as expected. But the internals are already showing what is coming as the second derivative price rises stall. TSLombard:

May CPI was high by any measure, but a quick look inside the data shows the pace is beginning to decelerate. The pace of change for core CPI and for services excluding rent, decelerated on a m/m basis in May (chart below).The percent change prices for core commodities did pick up, much of which reflects the price of new cars (1.6% m/m vs 0.5% in April)–lack of supply due to the chip shortage. On the service side, airline fares were up 7% m/m, a slowdown of sorts from the 10.2% increase in April. Hotel prices were up only 0.4% compared to 8.8% in April. Lastly, the price of personal care services was down 0.6% on the month. Rents have begun to creep up and we suspect the disinflation from this large contributor to overall CPI is now past its cyclical low and will add to overall inflation in the coming months–although far from the extent we have see from other commodities and services.

These price changes underscore our long-held point that supply/demand imbalances are at work–inflation needs leverage and leverage needs higher wage expectations. To be clear, inflation is process not price changes per se and critical to this process is high expectations for salary raises. We illustrate this in the chart below showing the relationship between consumer expectations for income in six months(Conference Board survey) and growth in revolving credit relative to wages. During a recession, everything drops together–no surprise. But in this year, despite seeing higher prices and having higher inflation expectations, consumers are not using credit cards to “buy in advance” and they will not until they believe wages are going to move higher as well.

Inflation is a bust. Commodities will crack next.

We may see a falling US dollar ahead as yields tumble, though Aussie yields are falling even faster.

If so, I will use any pop in the Aussie dollar to get offshore before commodities take it down.