ECB, Bank of Canada and the base effect of the peak in the US CPI

French elections

As the flow of economic information improves, the political challenges intensify. No, this is not the French elections next April. The dismay has been expressed in some quarters that Le Pen is ahead of Macron, but it is more about Sturm und Drang. The election is 10 months away, and the vaccination program and economic reopening should strengthen Macron’s position. More importantly, we’ve seen this before.

Le Pen’s solid base helps it when there are a lot of applicants. In a second round, Le Pen loses. The German elections are closer and we can say with confidence that Merkel’s successor will be elected. The latest polls show that the CDU is back in the lead. The Greens follow closely. The SPD risks being relegated to third place. Predict.Org’s bookmakers and political bettors prefer CDU’s Laschet to Greens’ Baerbock as their next chancellor.


Brexit was a particularly British drama, but it also reflected a wider development of economic nationalism on the one hand and the hardening of the EU’s external walls on the other. Switzerland has formally withdrawn from the negotiations to codify its 120 (more or less) bilateral agreements in a single framework. In Bern, it was a victory for the right-wing populist party SVP. Yet this is the tip of the proverbial iceberg. Two years ago, the Swiss stock markets lost the right to serve European investors. Since the middle of last month, Swiss companies have been stockpiling some goods such as medical equipment and industrial machinery due to the trade disruption that has already started.

Norway holds national elections in September. Polls suggest that a government can be forged where a majority no longer wish to be in the European Economic Area (EEA), a free trade agreement (excluding agriculture and fisheries) that brings the European Free Trade Area (Norway, Iceland and Lichtenstein) and the EU together. The center-left coalition could replace the current center-right, but power could ultimately lie with a small party whose support is needed to forge a government, as was the case in Switzerland.

And, let’s not forget, Brexit isn’t completely over either. EU officials are increasingly frustrated by the UK’s refusal to fully implement the Northern Ireland Protocol. British negotiators had enough cord and hanged themselves, some would say. A customs border in the middle of the Irish Sea has been ridiculed by leading Tories, including former Prime Minister May. It’s to Brexit what Dogecoin is to crypto. What started out as a joke has turned into something serious. The Joint Brexit Committee (EU and UK) will meet in the coming days. The Brussels objective is modest: to define a common approach to settle disputes.

Bank of Canada

The day before the ECB meeting on June 10, the Bank of Canada holds its policy development meeting. At the previous meeting on April 21, the BoC was surprisingly hawkish. It announced a slowdown in its bond purchases and predicted that the economic slowdown will be absorbed in H2-22, which opens the door to a rate move. Since the last meeting, the Canadian dollar has led major currencies higher with a gain of around 3.4%. The market anticipated nearly 60bp in tightening by the end of next year. It sounds too aggressive.

The Canadian jobs report is disappointed for the second consecutive month. Ahead of the weekend, Canada announced the cut of 68,000 jobs in May, more than double the median forecast from the Bloomberg survey. It lost 207,000 positions in April. Canada lost nearly 145,000 full-time jobs in April-May. Overall this year, Canada created less than 75,000 jobs. Without going back on its April assessment, the Bank of Canada may point out the uncertainty and variability in reopening the economy and that patience is needed, which could help extend the consolidation / correction phase.

Central banks of emerging markets

A few central banks from emerging markets are meeting (Poland, Russia, Chile and Peru). Apart from Russia, they are grappling with the same thorny problem. Price pressures are mounting and far exceeding key rates, but economies still need support. Peru’s second presidential round will take place on June 6. Since the end of April, the Peruvian sol has fallen by around 1.8%, making it the weakest emerging market currency after the 4.3% drop in the Turkish lira.

Incidentally, Chile is holding elections in November. The Chilean peso has performed only slightly better since late April and is the third weakest emerging market currencies. New measures allowing pension funds to be withdrawn (fourth time) amid concerns over yields and nationalization have disrupted the stock market. The intervention to support the peso limited the reaction in the forex market.

Inflation in Poland is increasing like Hungary and the Czech Republic (4.8% year-on-year, double the rate seen last February), while the key rate is only 10bp. A decision at the June 9 meeting seems unlikely as bond buying continues. Still, the market appears to be aggressive in pricing with a key rate close to 40bp by the end of the year.

The Russian powerhouse meets on June 11. It raised its rates by more than 75bp in total in the last two meetings to bring its key rate to 5.00%. Inflation is on the rise. It stood at 5.5% in April and is expected to move closer to 6% in May. A 25bp rise is expected, and the risk of a 50bp move is greater than the risk of its stability. Despite rising oil prices by more than a third this year, the ruble edged up 2.25% against the dollar. The correlation (over 60 rolling days) of the change in the ruble and the change in the price of Brent oil peaked a year ago at around 0.66. It is close to 0.20 for the last 60 days.

CPI figures

Last but not least, in the coming week, the United States and China will release the May CPI numbers. The US CPI continues to accelerate, but the good news is that the base effect peaked last month. In May 2020, both overall and core measures of the US CPI fell 0.1%. They should be replaced in the 12-month measures by an increase of 0.4% in both. This will bring the year-on-year rate to around 4.7% and 3.5% for the headline rate and the base rate. In 2020, the overall CPI rose 0.5% in June and July. As these declines from year over year pace are likely to level off and maybe even slip a bit. The key rate rose 0.2% last June and 0.5% last July.

We quickly add two caveats. First, the Fed is not targeting the CPI but the PCE deflator. Although officials talk about the base rate, the target applies to the overall rate. Second, Fed officials recognize that temporary and technical factors are driving price pressures and they will look beyond the near-term rise. Words like temporary and even the Fed’s use of the average as a target for the average inflation rate are very slippery and have not been defined. While this allows the Fed maximum flexibility, it is not entirely satisfactory for investors and businesses.

Consumer inflation in China bottomed out late last year, but deflationary pressures were still evident in January and February, as the CPI was still below zero year-on-year. Even though on a month-to-month basis, China’s CPI fell 0.5% and 0.3% in March and April, respectively, the year-over-year pace has accelerated from -0.2% in February to 0.9% in April. Prices are expected to have accelerated at a 1.6% year-on-year pace in May. This would be the highest since last September.

A striking development is that food price inflation has calmed down. In August last year, food prices were up 11.2% year-on-year. Non-food prices increased 0.1%. Fast forward to April, and food prices fell 0.7% year-on-year, while non-food prices rose 1.3%. The inflationary threat does not come from China’s consumer prices, but from its producer prices.

With the sole exception of January 2020, Chinese producer prices fell year on year from mid-2019 to the end of 2020. On the other hand, US producer prices increased by 1.0%. at 2.0% year over year. in H2 19. The deflation of producer prices occurred from April to August of last year. Yet the driver was not so much in China per se as the economic consequence of the Covid-related disruptions and shutdowns.

Some observers fear that the rise in the Chinese PPI could fuel the higher US CPI. It is possible but doubtful. First, Americans, like other high-income countries, spend more on services than on goods. Services are generally not product intensive. Second, the most important components of the CPI are related to health / medical care and housing, which also do not appear to be determined by commodities. Third, even many of the goods that consumers buy tend not to be commodity intensive. This is certainly true for most electronic products (eg, computers, cell phones). What about an auto, you ask. Direct raw material costs are estimated to be approximately $ 3,000.

Indeed, Peter Drucker identified the decoupling of commodity economics from industrial economics as a key feature of modern economics in Foreign Affairs in 1987. He would not be surprised, and we should not, that if Chinese producer prices fall from the middle of 2019, consumer prices in the United States were increasing at a rate of 1.7% to 2.5% year-on-year until the pandemic struck. The yawning gap in China between consumer and producer prices can say a lot about the profit margins of some Chinese companies or the risk of higher consumer inflation. Still, it doesn’t seem to say much about consumer prices in the United States.

This article was written by Marc Chandler, MarctoMarket.

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