What has happened
Equities gained yesterday ahead of today’s important US CPI release. US 10-year Treasury yields also rose as risk appetite returns to markets after the short and sharp sell-off last Thursday. The $38bn Treasury auction helped this rise in yields but the auction saw reasonable demand from investors, reducing fears of a supply/demand mismatch in a big week for issuance.
Digital standards
Reports were circulating overnight that the White House were discussing proposals for a digital trade agreement between countries originally in scope of the Trans-Pacific Partnership. The TPP never came into force as President Trump withdrew the US’s agreement and whilst the other countries formed a partnership, without the economic weight of the US it had far less clout. The proposals seek to set minimum standards for the digital economy including rules around data security. Also on the topic of digital, the EU have shelved their plans for a digital levy as they work with on the OECD proposals for a global minimum tax rate.
US CPI
Today’s US CPI number is released at 1:30pm UK time and will help determine whether investors follow a reflation or secular stagnation narrative in the third quarter. Whilst the Federal Reserve does not react to one individual data point, the recent beats to the upside have been a major factor in the upgrade to 2023 interest rate expectations at the last meeting. The Core CPI number (which excludes energy and food) is expected to come in at 4% year on year as the base effects from last year’s deflated numbers continue to play out. The main question for today will be whether the inflationary pressures are coming solely from areas impacted by the reopening or whether they are now broader based. Should inflation prove to be more widespread this could bring a resurgence of the reflation narrative which has been in retreat over recent weeks.
What do we think
With the US 10-year Treasury yield still at February levels, despite a small rise in recent days, there is little room for surprise from the CPI figures. Whilst we retain our belief, on the margin, that inflation in 2021 is reopening driven and will prove transitory, the debate will not be settled in the near term meaning it is unlikely that this is the last we’ve seen of the reflation narrative.
