Trail 20 — Red hot Inflation and Central Bank divergence
Feb 11 2022 (Editor — Sylvia Lo)
Red Hot Inflation
U.S. consumer prices surged in January sending the annual inflation rate to a fresh four-decade high (~7.48%) and rising across all its constituents.
Goods inflation, thought to be high because of supply chain disruptions, keeps soaring higher. According to a recent Labour report, it reached a peak of 12.3% in January, the highest since 1980. At the same time, services inflation has begun to pick up, rising at an annual pace of 4.6% in January, the most in 31 years.
The Bloomberg Agriculture Spot Subindex, which tracks nine agricultural commodities, is also nearing an all-time high. Supply chains remain the driver of food inflation, signalling that inflation is unlikely to be transitory or to ease prices anytime soon.
50 bps Rate Hike
The latest inflation data has increased pressure on the Federal Reserve to take a stronger stand against inflation.
After the release of new inflation data, traders switched gears by betting that the Fed would start rate hikes with a “big bang” (50bps) and to set a policy path that would see rates land around 1.75%-2.00% by the end of the year. The yield on two-year Treasuries rose the most since June 5, 2009.
Divergence
As the Federal Reserve looks set to raise interest rates, the planned divergence from other major central banks has injected some volatility into the global asset market. The Bank of England has already set higher interest rates is ahead of the European Central Bank, who will likely wait until the end of the year. The Federal Reserve finds itself at a crossroads as it attempts to pull its pandemic-era stimulus and diverge from the pack.
It appears that all the major central banks are now taking a “hawkish” stance, tilting towards higher borrowing costs as opposed to the “dovish” stance of wanting to keep rates low. But, each central bank is moving at its own pace. Navigating this divergence will be key for day-to-day market participants in the global interest rate markets. For the more long-term holders, “short (sell) bonds”.
Editor’s Corner
Crypto meets Media
Binance, the world’s largest cryptocurrency exchange, is making a $200m investment into Forbes, making it the company’s second-largest shareholder. According to CNBC, the investment will give Binance control of two of Forbes’s nine board seats. Binance CEO, Changpeng Zhao, sees this as a means to control information about the industry. “As Web3.0 and blockchain technologies move forward and the crypto market comes of age, we know that media will be an essential element to build widespread consumer understanding and education,” Zhao said in the press release.
Vaccine Inequality
Governments worldwide have poured billions of dollars into vaccine research, of which a select few companies have benefitted immensely. Moderna, currently one of the most expensive vaccines for countries outside of the U.S., is now facing shareholder pushback as it scrambles to explain its pricing strategy, which has created unequal access to its life-saving technology. Detailed in this New York Times report in early October, Moderna spent most of 2021 serving rich countries such as the U.S. and Germany, sending only a million doses to low-income countries. “It really is a stain on our global soul, and it affects us all because people are beginning to realise that if we allow the disease to spread in poor countries and the virus mutates, it comes back to haunt even the fully vaccinated,” said former British Prime Minister Gordon Brown. While Moderna is busy profiting from the pandemic, it seems the rest of the world, even greedy shareholders, just want their old lives back.
Until next week.
Financial markets are fascinating, and I see them amalgamating the subjective and objective worlds. They are constantly evolving, follow no predetermined path and much like humans and society in general, their behaviour at most times is irrational. Yet, their day to day functioning is seemingly driven by facts and reasoning. They are filled with plenty of stories of triumph, tragedy and comedy. Every day they are thoroughly analysed and tried to make sense of. Yet, their future steps or directions cannot be predicted based on history. They follow a random walk. Therein lies their beauty.
If enjoying making sense of their randomness is as appealing to you as it is to me, each week, I briefly recap a few stories that captured my interest, with embedded source links available for those who wish to read more.
