A Good Guess Is We Will Have To Get Used To The Fast-Changing Winds Of Inflation

We will have to get used to the fast-changing winds of inflation sentiment, hence monetary policy direction. 

Risk

We will have to get used to the fast-changing winds of inflation, and as such, when the next US rate hike happens. The conflation of these two market risks will likely both crescendo and diminuendo risk appetite for the rest of 2021.

Everything on the screens suggests taper tantrum fears are building, and investor reaction is understandable, even if inflation is still a 2022 issue.

More broadly, the or risk markets, in general, are a lot less concerned with the nominal rate rise and much more interested in the mix between real and inflation. In basic terms, rising real rates, or ‘the cost of money’ are bad for risk; rising break-evens are good.

The real danger in higher Treasury yields is not the Fed or inflation—it’s the market’s perception of a threat that is likely much greater than anything that might even actualize. 

Oil

The gradual return of US production after the weather disruption of last week has done little to erode the bullish view.

Although down from recent highs above $65/b, is still pricing a positive outlook on the macro environment in 2021 and an ongoing tightening of supply and demand.

Next week, the OPEC+ meeting is likely to underscore the tension between the more optimistic view of oil markets espoused by Russia and a few others and the cautious stance of Saudi Arabia. It will be interesting to see whether Saudi Arabia uses its unilateral 1mb/d cut as leverage to encourage Russia and others to delay further increases to production. However, the recent rally in oil will make it challenging to keep the bulls in check. 

Forex 

continues to leverage on a faster UK COVID-19 rebound while the and the where mesmerized today by Germany’s expectations index, which came out at 94.2, higher than the forecast of 91.7.

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