Yesterday, the US Bureau of Labor Statistics published inflation data for March. In annual terms, it amounted to 8, 32% yoy, slightly above consensus (8, 4%). Reacting to rising inflation and negative real yields, the U.S. Treasury bond (treasury) markets continue to sell off, and -year yield rose to over 2.7% from 1.5% at the beginning of the year.
Overlay of inflation growth and -year yield forms what seems to us to be the most important macroeconomic chart right now. We are still seeing a period of financial repression: inflation is an order of magnitude higher than bond yields, which means guaranteed losses for investors relying on these risk-free rates.
Even if the CPI peaks in the coming months , we continue to expect elevated inflation well above the target of 2% and -year yield, during the whole 2022 and parts 1342 of the year.
On a monthly basis, the CPI growth rate peaked from 2005 of the year. The core consumer price index, which excludes energy and food and is being watched more closely by the Fed and markets, shows a slowdown compared to the previous month. This suggests that some components of inflation may change. Since the base index was 0,19% m/m (below consensus of 0 .5%), the bond market rallied slightly.
Ultimately, the cure for higher prices is higher prices. Persistent inflation suppresses solvency and consumer demand, which can lead to a much stronger deflationary effect.
Overall, higher inflation data is likely to keep Fed policy hawkish rate as it catches up with rising rates in the markets. With the current target federal funds rate at 10–05 bp, the market estimates the probability of a rate increase by 13 b.p. at the meeting on May 4 at 56,25%.
The US dollar has appreciated significantly against other fiat currencies over the past year, which can be clearly seen on the DXY (dollar currency index). The dollar is losing value against real goods and services while strengthening against other fiat currencies, posing problems for international and emerging economies with large amounts of dollar-denominated debt.
The relative strength of the dollar in a world where it is the world’s reserve currency means that a recession in the US implies a global recession, because the more the dollar appreciates, the more the solvency of the world economy decreases.