Will US Inflation Roar Its Ugly Head?

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China sanctions Lockheed Martin
UK 2 year dip below Japan
Nikkei 0.87% Dax -1.51%
UST 10Y 0.63
Oil $39.85
Gold $1798/oz
BTCUSD $9215

Asia and the EU
EU CPI -.3% vs. -.3%

North America Open
USD CPI 0.5% vs -0.1%

There was a mixed tone in the markets today with European indices sharply lower as Dax traded more than -1.5% down while the US futures held their own trading about a third a percent higher across the board.

US-China tensions continued to dog the market after China announced sanctions against Lockheed Martin in retaliation for US comments on the South China sea yesterday that questioned China territorial ambitions in the area. US futures dipped on the news but recovered staying green throughout morning European dealing.

In FX most of the majors were essentially unchanged but cable drifted lower after disappointing UK economic data in May. The UK reported that growth in May rebounded by only 1.8% indicating that the country may be facing structural problems besides the shock from COVID. UK GDP is now effectively only 75% of what it was pre-pandemic and with Brexit looming on the horizon its difficult to see how growth will be possible as the UK faces fresh friction costs in its trade with EU.

UK 2 year yields slipped below Japanese yields of the same vintage – a remarkable testament to just how pessimistic bond traders are with respect to UK growth prospects. Cable was lower by more than 30 pips drifting towards the key 1.2500 figure and if currency markets become convinced that the BOE will move to zero rates sterling could drift towards 1.2000 as the year proceeds.

In the US markets will keep an eye on CPI figures due 12:30 GMT. The market expects price levels to remain muted with core CPI at 1.1% versus 1.2% the period prior, but headline inflation may creep uncomfortably higher with the forecast looking at a 0.6% rise versus 0.1% in May. Any upside surprise on the nominal level could trigger alarms that Fed massive monetary pumping is starting to make its way through the real economy even as the rebound in US economic activity slows. All of this could be very bad news for stocks which have relied on effectively free capital to power higher. Yesterday’s reversal in Nasdaq may have already signaled that markets are starting to question the relentless rally in high tech and today’s inflation data could add more pressure if it shows a sharp spike.

Boris Schlossberg
Managing Director

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