Another terrific note from Nordea:
Finally, there was a pick-up in volatiliy. At least in the equity market. Bond and currency markets didn’t react much at all to the surprise surge in the US CPI “inflation” index. By the close of the week, the latter two markets (2y/5y/10y yields and the DXY index) had retraced most of the already limited turbulence on Wednesday.
The April surge in US core inflation suggests EUR/USD should start to plummet in Q3, as the Fed might need to be repriced more hawkishly. The inflation spread will however bounce eventually, when for instance base effects from last year’s VAT cut drive up Germany’s core inflation. And some central banks have even warned us not to pay too much attention to inflation in 2021 as the figures will remain volatile owing to various pandemic effects. Still, we want to show this chart as thinking can be very harmful if it becomes “overthinking”, which will, alas, only be evident ex post.
