Week Ahead: ECB & U.S. CPI the main events

The post-NFP response took us back into familiar territory.

Bonds were bought, yields fell and took the dollar down with them...

Risk assets 🚀🚀🚀 with tech leading the way.

There are two dominant narratives that I'm monitoring

A) This is a new economic cycle, and we will soon transition into a phase of renewed economic growth. After a historically rapid recession, pent-up demand will fuel the lasting recovery. The spectre of inflation looms large as people refuse to work for lower pay and supply shortages mean people become accustomed to rising prices and adjust their behaviour accordingly.

Fed's new AIT & the massive fiscal response change everything etc.

B) This is a repeat of the previous economic cycle, and we will simply return to the prior trend of low economic growth, low yields & buying riskier assets & growth stocks to compensate.

Massive oversimplification, but you get the idea.

The NFP reaction suggested that Narrative B is in charge for now.

Personally, I don't believe the balance has changed.

Temporary disruption is being extrapolated into a permanent shift.

These increases in pay were already starting to filter through pre-Covid.

The $15 minimum wage campaign was already underway, with some of the larger companies such as Amazon introducing it voluntarily.

Much like inflation, the power has not changed.

Liz Ann Sonders at Schwab talks about a Boom-Settle rather than a Boom-Bust or Roaring Twenties.

Although this reference is aimed at the rate of economic growth and corporate earnings, it can be applied more broadly to inflation and wage pressures too.

While I DO think things will change in the future, we've still got a way to go yet...  

This is bang on the money 👇

The Fed has explicitly said that inflation will be transitory, and they're looking (primarily) for wage-driven inflation as the trigger for rate hikes.

QE will almost certainly be tapered next year (pre-announced in August/September) unless something goes terribly wrong with the recovery.

Thursday is the next big test.

What is the current market view on inflation?  

Nordea make the case for a U.S. inflation shocker 👇

The market looks to be onboard the transitory train for now, but an above-consensus headline number may set a few nerves jangling.

At the same time as the CPI data, we will also see the weekly claims data release, and the always riveting ECB press conference get underway.

Lagarde's PEPP talk will be keenly watched.

No-one expects an increase in purchase from the current 80bn/month pace, but there could be hints at a slower pace going forward 👇

This U.S. CPI & ECB combo should have an impact on bond markets, and drive FX volatility through rate differentials, especially in EURUSD.

Asset managers continue to favour USD shorts...

While retail are still favouring USD longs

How about equities?

Stocks to continue climbing the wall of worry?

It's hard to see why they wouldn't for now...

Knocking on the door of ATH's once again and that chart doesnt even look slightly bearish.

Have a great week!