Inflation watch

Macro 8 minutes to read
Eleanor Creagh

Australian Market Strategist, Saxo

Summary:  Survey data points to higher inflation driving bond yields upwards, we discuss.


The initial impact of the crisis has been disinflationary, in official price indices at least. Beyond that however, change is afoot, and we see increasing capacity for inflationary pressures to emerge in official measures over the next 12 months, particularly against incoming low base effects, in turn pushing longer-dated bond yields higher.

Supply chain bottlenecks, raw materials prices, food prices, and soaring freight shipping costs all point to inflationary pressures on the supply side that are already here.

ISM Prices

A lot of survey data is confirming these significant cost increases. ISM’s January index of prices paid for raw materials is at the highest level since April 2011, pointing to building price pressures in the US manufacturing industry and signalling much higher inflation ahead.

“We are seeing significant cost increases in logistics and raw materials.” (Machinery)

The Prices Index registered 82.1%, up 4.5 percentage points compared to the December reading of 77.6%, signalling headline inflation could rise above 3% in the year ahead. All 18 industries surveyed reported paying increased prices for raw materials in January.

China PPI

China’s producer price index is another indicator of price pressures creeping through the system. The producer price index rose 0.3% from a year earlier, and 1% from the prior month. Increases in prices across almost the entire commodity complex, from copper, coal and oil to battery metals and rare earths, is buoying factory gate prices and China will soon start exporting those inflationary pressures to the rest of the world.

As commodities continue to inflate, PPI inflation will build, likely feeding through to consumer prices (or margin pressures) outside of China.

That will add more spice to the ongoing rally in commodities. Chinese producer prices turned positive in January having remained stagnant for long. One month’s data does not a trend make. But a strengthening uptrend for factory gate prices in the world’s biggest manufacturer would likely exert pressure on consumer prices in America and elsewhere. China’s PPI has a close relevance with U.S. headline CPI, showing an r*square of 0.75 on the regression over the past three years.

Empire survey

The prices index is soaring higher, corroborating the trend seen in other survey data. Both prices paid and received are each at their highest levels in nearly 10 years.

Food inflation

The global food inflation seen over the past year is here to stay. With the highest corn and soybean prices in 7 years, farmers are being squeezed, particularly those feeding cattle, hogs and poultry. Some reporting that the cost of raising there herds has inflated more than 30%.

Producers like Tyson foods are already increasing prices, which will exert upward price pressure through supply chains in the year ahead.

Price pressures are clearly building. The bond market is responding to these repeated inflationary reads, and will continue to do so, with the 10yr yield continuing to breakout hitting new cycle highs and yield curves steepening.

Coupled with demand side pressures coming from the profound shift toward fiscal primacy – aimed at securing jobs, reinvigorating demand, and fighting inequality - by most Western economies, we have almost a perfect storm for higher inflation. Money printing aimed at demand generation is inherently more inflationary than asset purchases. Money is heading straight to the pockets of those with the highest marginal propensity to spend. Under the banner of this social stability agenda, exacerbated by the pandemics K shaped recovery dynamics, policy makers are willing to take a risk on inflation.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
Most of our staff in Singapore are working from home to help limit the spread of the coronavirus. We remain at your service on the details below. Thank you for your understanding.

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.