Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

How Long Is Transitory?

By Marc ChandlerMarket OverviewJun 20, 2021 02:12AM ET
www.investing.com/analysis/how-long-is-transitory-200587104
How Long Is Transitory?
By Marc Chandler   |  Jun 20, 2021 02:12AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The Bank of England meeting on June 24th finishes this round of major central bank meetings. At its last meeting, Bailey & Co reduced the weekly bond-buying. The extension of social restrictions well into July provides added reason to be cautious, though economic activity is accelerating and consumer prices are rising faster than the medium-term target of 2% for the first time in three years.

British growth is likely peaking this quarter, perhaps a little above 4%. It would put H1 21 growth around 2.6%. The pace of activity is likely to slow to around 2% in H2. Growth in H1 22 may be closer to 1.5%. Return to normalcy, indeed!

The same can roughly be said about the US as well. The quarterly pace and the year-over-year increase are expected to peak here in Q2 21 also. Both the Atlanta and St. Loius Fed tracking GDP models see Q2 GDP at a little more than a 9% annualized rate. The slowing, however, will be moderated by the mid-July start of two new initiatives designed to help lower and middle-class families: the Child Tax Credit (~36 mln families qualify) and the Earned Income Tax Credit that will run at least through December. As a result, above 3% growth may be achievable into early 2022, but by H2 22 and the mid-term election, growth is likely to return to the status quo ante below 3%.

The preliminary June PMI reports are the data highlight of the week. They may pose some headline risk, but in the reaction function of policymakers and private decision-makers, the news will be of little consequence, confirming what is already known. The vaccinations are making possible the gradual and uneven social and economic re-opening. Low interest rates, the fiscal stimulus of various stripes, and rebuilt savings appear to provide a friendly environment for robust economic activity. The PMI is a useful snapshot of this process.

Japan is the only G7 country where the composite PMI is below the 50 boom/bust level (48.8 in May). Tokyo and several other prefectures' formal state of emergencies are set to lift on June 20, but reports suggest lighter restrictions may be imposed ahead of the start of the Olympics and Paralympics. Holding the games during COVID was terribly unpopular in Japan, though public opinion appears to have softened a little. Nevertheless, the G7 statement recognized the importance of  holding the event safely and securely "as a symbol of global unity in overcoming COVID-19."  

The central banks of Hungary and the Czech Republic meet next week. The market anticipates rate hikes, which have very little to do with the Federal Reserve. Hungary expanded by 2% quarter-over-quarter in Q1. The multilateral organizations (IMF, World Bank, and OECD) estimate Hungary's growth this year between 4.3% and 6.0% and between 4.7% and 5.9% next year. CPI is up about 5% from a year ago and is running closer to 8% at an annualized pace over the past three months. Its key policy rate sits at 60 bp. To lift it to 90 bp, which the market expects, is hardly a tight monetary policy. Next week's move will likely begin a sequence of hikes, and the market anticipates two hikes in the second half of the year.

After contracting by 2% in Q1, the Czech economy's recovery is underway. The market (Bloomberg survey) anticipates 3.5% growth this year and 4.5% next. CPI is running around 3%, while the official rate target is a lowly 25 bp. It is great that the Czech Republic was able to push its overnight rate well below zero in real terms, but that period is coming to a close, and it has very little to do with decisions made in Washington, DC. The 25 bp hike appears to be discounted, and the participants appear convinced of at least one more hike this year, and possibly two.

II

The Federal Reserve, the European Central Bank, the Bank of England, and the Swiss National Bank have argued that the elevated inflation levels are temporary. But, of course, not everyone agrees, and some hedge fund managers seem to be talking their book. One claimed that US inflation is closer to 12% than the 5% of the national CPI. Another claimed that if the Fed did not respond more forcefully, he would go "all-in" on the inflation trade. He defined this as commodities, gold, and crypto.

Central bankers can be lampooned and criticized, but they are not the outliers on this issue. The June survey by Bank of America found that 72% of the asset managers see inflation as transitory, with 23% saying it is permanent. Still, the allocation to bonds fell to a three-year low. Moreover, fund managers see the long commodities trade as the most crowded, eclipsing Bitcoin, which 81% saw  in "bubble territory."  

Although it has been claimed that crypto, and Bitcoin, in particular, is a good hedge against inflation, the evidence is not there. For example, the 30-month rolling correlation of the change in US year-over-year inflation and the change in the price of Bitcoin has mostly been inverted in its brief history. Moreover, it peaked in mid-2017 and in Q1 21 in the 0.35-0.40 area when it spiked.

Gold is not as correlated to US inflation as some may think. Again, running the correlation at the level of differences of the US CPI and gold on a rolling 30-month basis shows an inversion for most of the past seven years. The main exception was from August through September 2018, and even then, the correlation was insignificant (less than 0.05). The correlation is slightly positive (0.015) now.

To avoid confusion, the fact that both gold and Bitcoin have been inversely correlated does not mean they are significantly correlated with each other. The correlation had been positive (30-month changes) from July 2017 through February 2021. After that, however, it turned negative, and an inverse correlation of about -0.32 is the most extreme it has gotten. The correlation on more granular time frames (daily and weekly) is also inverse.

The CRB, a basket of commodities, enjoys a better statistical relationship with the US CPI. Before the pandemic struck, though, the correlation (30-month differences) was a little less than 0.2. The co-movement intensified after Q1 20 and has been hovering around 0.40 for the past year, which is the upper end of where it has been over the past decade. Remember, CPI (and PCE deflator) represent a weighted basket of goods and services. Almost two-thirds of the CPI basket has little to do with commodity prices: shelter (not construction), medical care, education, communication, and recreation.

Inflation expectations last month seemed to have been egged on by the rise in oil prices. Since the end of last October, crude oil prices have nearly doubled. They are third higher than they were at the end of 2019. However, the 10-year breakeven (the difference between the conventional bond yield and the inflation-protected security) fell from almost 2.6% on May 12 to nearly 2.3% on June 10, even as oil prices continued to climb. At the end of 2019, the 10-year breakeven was slightly below 1.80%. It had not been above 2%, the Fed's target, since late 2018. 

Some think a dramatic rise in oil prices is inflationary. Under the guidance of Trichet, the ECB hiked rates in mid-2008 primarily because it was feared that the rapid rise in oil would spur a general increase in prices. On the contrary, a dramatic increase in the price of oil is a negative shock for the economy. In the US, oil shocks have preceded the end of expansions. The rally in crude (~135%) in July-October 1990 helped knock the US into recession. The price of oil doubled in 1999-2000, and the recession hit in 2001. The price almost doubled from the 2007 low to early 2008, as the financial crisis hit.

Central bankers like to maximize their tactical flexibility. There is a good reason why Powell and Lagarde loathe it, to be more specific. The Fed has not even defined the period that its "average" inflation target applies. Surveys of economists are more precise. The headline PCE deflator, which the Fed targets, despite the media insisting on calling the core rate the Fed's preferred measure, is expected to return to the 2% target somewhere around the middle of next year. Just like the pace of US growth is near its peak, the year-over-year rate of inflation is also seen by economists to be peaking soon. Economists see  eurozone inflation reaching maximum acceleration in Q4 before falling back to below 1.5% for most of next year. The UK's CPI is expected to peak around 2.3% late this year and early next, before falling below 2% by the end of next year. 

How Long Is Transitory?
 

Related Articles

How Long Is Transitory?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (7)
Kevin Avila
Kevin Avila Jun 20, 2021 11:02PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Well if the FED is using the same timeline models for how lockdowns were implemented… “Transitory” means permanent.
Joel Schwartz
Joel Schwartz Jun 20, 2021 10:38PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Pull up a chart of the value of a dollar since the FED was created in 1913. It’s lost almost all value. That’s their flawed interpretation of “transitionary.”
my name
my name Jun 20, 2021 4:45PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
usa "temporary" stopped backing up dollar with gold decades ago. Also dollar lost 100% of it's purchase power in last 100 years. So as you can see "transitory " in reality means FOREVER!
Edward Lewis
Edward Lewis Jun 20, 2021 4:27PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Considering that the USD has lost over 50% of its value since just 1990 and we are now seeing even higher inflation rates, I would say "transitory" is just a linguistic propaganda term instituted when Biden came into office...like much of the other linguistic propaganda used by deceitful political entities and their media-mou.thpieces.
Jouni Matero
Jouni Matero Jun 20, 2021 2:18PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I'm sure FED invented the word and it's flexible as is FED's policy, serving their needs. Transitory could be 6 months but my guess is they will bend it to anything begween 5-10 years so they can say they were right.
Charles Sturrock
Charles Sturrock Jun 20, 2021 8:34AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
How long is "transitory"? As long as the Central Banks say it is. You can trust Central Banks, because they would never lie to us or distort the facts. BTW, anyone needing to buy a bridge? Got one for sale cheap, financing available.
Chris Poulos
Chris Poulos Jun 20, 2021 8:34AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
what kind of financing you offering? i'll buy the bridge for a mil if you give me a rate of -.75%
Chris Poulos
Chris Poulos Jun 20, 2021 8:34AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
can i make interest only payments?
William Bailey
William Bailey Jun 20, 2021 4:31AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Long enough to stall the economy out and cause a recession … The Fed already made the mess
Joel Schwartz
Joel Schwartz Jun 20, 2021 4:31AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The FED’s monetary policies will cause a larger crisis than the pandemic. The pandemic was transitionary - their policies were not.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email