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Not So Transitory.

By Swissquote Ltd (Ipek Ozkardeskaya)Market OverviewJun 30, 2022 07:20
uk.investing.com/analysis/not-so-transitory-200524898
Not So Transitory.
By Swissquote Ltd (Ipek Ozkardeskaya)   |  Jun 30, 2022 07:20
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Jerome Powell, Christine Lagarde, and Andrew Bailey blamed pandemic and the war for sending inflation off the chart at a European Central Bank (ECB) event yesterday. We blame them for having called inflation transitory and having been left behind the curve for too long.

The EUR/USD slid to 1.0430, and the euro bulls are gently leaving the market, increasingly less convinced that Christine Lagarde doesn’t have a magic tool to address the fragmentation issue in Europe. At this point, no one knows how the ECB will raise the interest rates and avoid the peripheral yields from spiking to crisis levels. But inflation in Spain and Belgium spiked above 9% in June, while the ECB is not expected to raise the rates by more than 25bp at its next meeting. Seems insignificant to you? To us, too.

No wonder the euro-swissy is below the 1.00 mark. If the fall continues, the Swiss National Bank will likely intervene.

More inflation

The US will release the latest PCE figure today, which will likely show no pleasant surprise in the US, either. But happily, for the Federal Reserve, investors don’t care much about the PCE index, even though the latter is what the Fed is watching to determine whether inflation is in line with its policy.

The PCE index was at 6.3% last month, much lower than the CPI index as the PCE gives a lower weight to gasoline and rents, which sent CPI inflation skyrocketing. Therefore, even if the Fed could bring the PCE down to 2%, it won’t solve the problem of high energy, high rents.

US rents, for example, hit another record high in June, up 14% over the last year.

Anyway, the chances are that we won’t see PCE hinting at lower inflation anytime soon.

Russia isn’t happy.

The tensions between Russia and the West continue rising as NATO decided to welcome Finland and Sweden in the alliance. Putin threatened that if NATO infrastructure is deployed in these countries, Russia will have to respond in kind. Oil prices remained fairly contained, however, as the European Union agreed on a framework to eliminate carbon emissions for new cars and vans by 2035. And they better respect their deadline because the oil giants will not invest in extra refining capacities knowing that they will be out of business in many key markets in less than 15 years.

US crude consolidates above the $110pb this morning after having advanced to $115 yesterday. Sentiment remains comfortably bullish as OPEC will unlikely surprise for a second month at today’s decision. OPEC countries have struggled to meet their production targets last month, pumping around 3 million barrels less per day than their 42 million target. This means that the supply problems will remain the major headline in oil, and the prices will likely push higher unless the recession fears take the upper hand.

Not So Transitory.
 

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Not So Transitory.

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Comments (3)
Sanjay Tailor
Sanjay Tailor Jun 30, 2022 11:49
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Agree that raising rates for demand side inflation nips it in the bud and the faster they are raised the better. BUT How does raising rates to combat demand side inflation help? If anything, rates should be lowered to allow businesses to get cheaper money and allow them to reduce their prices. Straving Joe public for his mortgage in a cost of living crisis surely makes the situation worst.
Daryle Goh
Daryle Goh Jun 30, 2022 11:08
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hahaha nice and straight to the point! i like your writing, Ms Ozkareeskaya!
Zahid Khan
Zahid Khan Jun 30, 2022 8:06
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All are asking for war… that is political. Leaders should grow up.
Stephen Hunter
Stephen Hunter Jun 30, 2022 8:06
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QE has put Billions into the system, we are now experiencing the pain of short gains which benefited markets more than workers who are the ones suffering the consequences
 
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