Australian dollar smashed as US inflation skyrockets

See the latest Australian dollar analysis here:

Macro Afternoon

The bond backup is back and risk assets don’t like it with all kinds of action around the Australian dollar last night. DXY took off:

The Australian dollar was pounded against all DMs:

Gold was smacked. Oil held:

Base metals flamed out:

Big miners rolled over:

EM stocks look like a suicidal cliff jumped:

Junk was hit:

As US yields took off:

And stocks were smashed, led by tech:

Westpac has the wrap:

Event Wrap

US CPI in April rose by a surprisingly large 0.8%m/m (est. +0.2%m/m) to 4.2%y/y (est. +3.6%y/y) – the largest monthly gain since 2009. Core measures also surprised, ex-food and energy up 0.9%m/m (est. +0.3%m/m) to 3.0%y/y (est. 2.3%y/y) – the largest monthly gain since 1981. Among the components, the largest surprise was the record 10.0%m/m rise in used vehicle prices, but gains were broad-based.

FOMC Vice-chair Clarida spoke shortly after the CPI data, and reiterated the official stance:  “These one-time increases in prices are likely to have only transitory effects on underlying inflation, and I expect inflation to return to — or perhaps run somewhat above — our 2% longer-run goal in 2022 and 2023”,  adding “this outcome would be entirely consistent with the new framework the Fed adopted in August 2020.”He noted more concern over the labour market which “appears to be more uncertain than the outlook for activity.”

Eurozone industrial production in March was weaker than expected, rising a mere 0.1%m/m (est. +0.8%m/m, prior revised to -1.2%m/m from -1.0%m/m).

The EU increased its regional growth projections for 2021 to 4.2% (from 3.8%),  and for 2022 to 4.4% (from 3.7%), assuming successful pandemic vaccination programmes.

UK GDP in Q1 fell 1.5%q/q, slightly better than expected (est.  -1.6%), with low private consumption and business investment offset by governmentt spending and lower imports.
Monthly production data for March was better than expected, with industrial production rising 1.8%m/m (est. +1.0%m/m) and GDP  rising 2.1%m/m (est. +1.5%m/m).

Event Outlook

Australia: The May update of MI inflation expectations will be released. Expectations jolted lower in April and are firmly below pre-COVID levels.

New Zealand: We expect the April food price index will rise 0.8% on higher fruit and vegetable prices. The April REINZ report will be the first comprehensive read on the strength of the housing market since the Government’s announcement in late March, which significantly tightened up the tax treatment of property investors. Indicators so far suggest that house sales were still perky through April, although auction clearance rates fell. The key new information will be whether prices have continued to be bid up at the white-hot pace seen in recent months.

US: The April PPI should lift 0.3% on rising commodity input prices. Initial jobless claims have printed fresh pandemic lows in recent weeks – the market is looking for another fall to 490k in the week ended May 8. The FOMC’s Waller and Bullard will speak.

The key release was US CPI which blasted off (no surprise at all to MB readers). Core CPI roared to 3%, trimmed mean to 2.4%, and the key measure, Core PCE, to 1.8%:

This is a mix base effect and supply-side bottleneck inflation. It is temporary. A more serious inflationary challenge will emerge from the fiscally-primed US labour market over 2022.

But, even that is going to face a very large challenge. A deflationary tsunami is mounting in slowing Chinese credit and it will break upon the world before long.

Soon enough, deflating commodity prices and a falling Australian dollar will join tumbling EMs and a rising DXY to burst this inflation pimple.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

    • Every single commodity index is through the roof – most over 100% all with a minimum of 50% yr/yr – (Not gold). That is crazy ridiculous. And this is also over 5yrs and 10 yrs – so its NOT just a covid rebound – its genuine long term massive inflation.

      On top of that every single NON-COMMODITY index is collapsing – down 3% on average over night.

      US has pumped close to $8 Trillion into their economy – wages exploding – but all this inflation is temporary.

      Sure – its temporary – if temporary is for 2-3 years.

    • The Traveling Wilbur

      Ding. Spot on.

      Inflation ✔
      Wage increases 🙈🙉🙊

      Ergo, yes we have no actual inflation, we have no inflation today.

    • So all your letters he read
      And made a scene at the restaurant,
      He usually just reads between the lines.
      Subscription Bells,
      He read the lines themselves,
      And I just sat there soaked in cheap red wine.
      Could we rehearse that one more time.
      Forgot almost every single line.

      I hear the distant knells,
      of Subscription Bells

    • Observation without wishing to sound churlish/combative – pure objective feedback.

      Editorial tone.
      Value for money proposition declined.
      Paying to comment (arguably some commenters here could be paid given the quality) questionable.
      Also inability to “ignore” commenters. Some commenters here seriously detract from the site.
      C/f to say Michael West, or Sam Harris’ pay what you can afford.
      Posts disappear into the ether for no reason and MB does not respond to request to release, or general questions (maybe all the sub money could pay for an admin).

      • Jumping jack flash

        I don’t feel bad because I have a decent percentage of my super with these guys. It doesn’t do too badly lately, but I was pretty tense for the first 12 months.

    • Instead of calling people bludgers ask yourself why. One reason would be driving people away by deletion of comments (paying member or not).

  1. working class hamMEMBER

    Will iron ore ever tank, will that bring down the price of BHP products? When should I upgrade the shed.

    • Always does.

      Price of iron ore remains incredibly static as the demand for steel via the Chinese construction industry is incredibly consistent year in year out.

      The only significant variability is HUGE trillion dollar infrastructure projects which are generally coupled with massive military construction hidden by the stimulus.

      The ore price spikes are like a steady heart beat with Chinese stimulus measures – an exact match really.

      Ore is brought in on the announcement of the infrastructure, steel is made and then shipped out – this process is ongoing for about 70% of the projects duration as steel is constantly required.

      Last time the Chinese built out all their Islands, Parcel, Spratly, also built massive underground Submarine bases – this time the word is they are expanding their massive subterranean tunnel system called the Great Steel Wall – which transports military hardware and missiles around the country – two or three lanes complete with train system. Apparently they have developed some new alloy which can resist deep penetrating bunker busting systems.

      So by the time this runs down – next few months – then into the new year they will be switching to recycling with electric arc furnaces (90% of US steel is made via this method) and a mix of imported ore from expanded domestic mines (which provide the majority of Chinas ore) and their new foreign mines – Australia / world export ore prices will go well below $40

      Disaster.

  2. One more bad month (May) to come and then that’s it for the inflation scare.

    • SoCalSurfCreeperMEMBER

      I think it’s becoming entrenched because mindsets have changed. People are now expecting price rises and are expecting to pass them on.

      • Its crazy how people are just throwing all basic economic theory out the window in favour of

        “I want this to happen just because”

        How do people reconcile global supply chain shortages, not just temporary but many permanent (trade war) with a global cash handout which is looking like heading towards a hundred trillion dollars – US is close to 10% of that – MORE if include their quantative easing.

        • Jumping jack flash

          No!

          This is basic economic theory distilled and refined to its essence and then injected directly into the economy’s brainstem.

          • Too funny, very good.

            Also CEO of Sachs resigns to start a hedge fund from the millions he made on Dogecoin.

            I mean…….wow.

    • Go look at the commodity indexes – you are joking with that comment right ? Almost none of them have risen LESS than 100% – but yeah, as we emerge from the global economic depression, with a hundred of trillion in stimulus around the world ready to spend and consume – things will go down.

      Oh, 10 year bonds jumped 5% over night.

      No – no, it absolutely is not temporary.

      • Black Adder, I wasn’t joking,.
        I wouldn’t be using US 10 year bond yields or commodity prices as indicators of future inflation.

      • SweeperMEMBER

        10y yield is still lower than it was before the pandemic started early last year, and a lot lower than where it was in 2019.
        This inflation hysteria is ridiculous. It’s just base effects.
        There is still 9m unemployed in the US and more in the EU

      • Depends how you measure it – sure pump prices are through the roof- but “trash” cans on the side of the road filled with gasoline are ballistic.

        This is really happening.

        https://www.youtube.com/watch?v=IOJXRs_V5Cw

        6 weeks till its fixed. (They have turned of production as supplies have filled storage lols).

      • Jumping jack flash

        High debt, low debt, it doesn’t matter, just that you have debt. And have a job that will benefit from high CPI. And keep your job.

  3. Jumping jack flash

    Nice!
    They’re doing it, as expected.

    CPI set to whatever it needs to be to counter the debt’s interest’s deflation? Here we go!

    Take a good look, Scomo and JoshyBoy, this is what you failed to achieve.

  4. Every single Australian household now owes half a million in debt combined government and private.

    The average home price in a town 5 hours from Melbourne on the edge of a desert is now $500k having increased from around $300k at the end of 2019.

    Bodies will hit the floor.