Macro-News round-up

🔍 Buckle up and get ready for today’s inflation data. Yesterday we already had a warm-up with the Jerome Powell speech. The ppi (producer price index), a precursor to inflation, came in slightly higher than expected, up 0.5% in April, versus 0.3% expected and up from -0.1% in the prior period.

🤔 The key question is whether the markets will tolerate a bad (high) inflation figure. All the optimism in the stock markets over the last two weeks derives from data showing a weakening US economy, GDP growing slower than expected, and an employment report showing a mild rebound in unemployment.

🔍 It is a little concerning to note that inflation expectations increased in the NY Fed poll yesterday, following last Friday’s negative results on inflation predictions in the University of Michigan consumer mood report. This indicates that inflation predictions for the next year increased from 3.0% to 3.26%. These inflation expectations are taken very seriously by central banks, and the Fed will find it difficult to disregard two such forecasts.

💬 From Powell’s speech we highlight the following:

– He admits that the inflation problem in the US lies in the services sector, as we had anticipated in our reports repeatedly: “Services inflation could take the longest to come down”.
– He also admits that persistent inflation is not out of the question, as we have insisted for our part with historical data since 2023: “The Fed does not yet know whether inflation will be more persistent. Confidence that inflation will come back down is lower than before”.
– Finally, it seems to at least rule out further rate hikes, but confirms that they will remain at current levels: “Tight policy may take longer than expected to reduce inflation. It is more likely that the next move will be to keep the policy rate where it is, not a hike”.

💬 Parallel to these statements, we also had comments coming from the ECB. Klass Knot, member of the European Central Bank Council and President of the Dutch Central Bank said the following:

– “A return to persistently low inflation and low rates is not very likely” (those times are long gone, we had better all accept that).
– “June could be a good opportunity for the first rate cut”. (That is, as long as inflation does not pick up or become persistent).
– Very important: “Policy divergence could weaken the euro and feed through to prices. Higher rates for longer by the Fed could lead to a slower pace of rate cuts by the ECB” (indicating that if the Fed does not move, the ECB could have problems cutting rates, as this would weaken the euro, make fuel and dollarized European imports more expensive, and thus bring price inflation).
– Optimism prevails: “The economic recovery is expected to accelerate in the second half of the year. Growing confidence that inflation will converge to target”.

📊 Meanwhile, the macro data of the day in Europe are as follows:
Sweden presents a lower-than-expected inflation rate, in line with the slowdown of its economy, since as we indicated in previous reports, its GDP has been in economic contraction for four quarters.
France’s inflation rate was in line with expectations, with April inflation rising by 0.5%.
Europe’s industrial production fell by 0.6% versus the 0.5% expected, down from 1% in the previous period. Eurozone GDP grew by 0.4% in the first quarter of 2024. This is what Klass Knot calls a recovery, I guess, considering that Q4 2023 left 0.1% growth in the eurozone.

💱 The dollar has appeared to react to yesterday’s words by the Fed with some weakening. The DXY is below 105 points at the moment, although we insist that a further upward push could lead it to a target of 107 points. Today’s inflation data could be the catalyst for this push. Consequently, to this situation, the EURUSD has rallied, and is above 1.08. But let’s remember, the divergence between the Federal Reserve and the European Central Bank should bring a bearish relationship in this pair, which is near the highs of a very long bearish channel.

💰 The yield on the US 2-year bond has also retreated to levels around 4.80%, from the 5% it temporarily managed to surpass during the first week of May. This was in response to Powell’s words, admitting that for the time being there would not be the promised rate cut.

🌍 Commodities:

🔋 The copper futures market is reaching record highs. copper, whose main producer worldwide is Chile, is highly linked to technological production (wiring and circuits) and mainly to the Chinese economy, the main buyer worldwide. therefore, we could say that the powerful rise of copper sets a good precedent for the expectations of economic activity in the Chinese industry.

💼 Additionally, the takeover bid from BHP, one of the biggest minim=ng companies in the world, which represented a 15% premium over the first offer, was turned down by Anglo American. The bid, which was estimated to be worth $43 billion, did not impress Anglo American, who believed the firm was undervalued. To prove to BHP Group that they are not to be taken lightly, they want to part ways and sell off some of their holdings. if its proposed acquisition of Anglo American is successful, BHP would become the world’s largest mining company. Therefore, from a strategic point of view, this is what is likely to happen.

🇷🇺 Russia has reported finding over 511 billion barrels of oil in areas of Antarctica claimed by the UK, according to evidence given to the UK parliament. This is about 10 times the amount of oil produced in the entire North Sea over 50 years. Any drilling in the region would intensify competing claims over parts of the British Antarctic Territory from Argentina and Chile. The issues will be discussed at an upcoming Antarctic Treaty meeting, as experts warn against allowing hydrocarbon extraction in Antarctica.

🌍 Geopolitics:

🇩🇪 Several German MPs say Western nations should consider stationing air defense systems along NATO’s borders with Ukraine to help shoot down Russian missiles over Ukrainian territory. One German politician referenced a previous incident where the US, UK and France helped Israel repel an Iranian missile attack as an example, air defences from Poland and Romania should not be ruled out protecting western Ukraine in the long term. The Kremlin has criticized ongoing Western military aid as proof of a NATO proxy war with Russia.

🇬🇧 Andrew Bridgen, a former member of the British Conservative party and parliament, said in a recent interview that the UK prime minister does not want to enter this war, and that he has told the generals that he does not want to be remembered as the PM who got his country into a war. However, Bridgen assures that those who have decided to go to war with Russia are above the PM.