Will inflation data justify investors’ concerns?

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Wall Street is beginning to fret about the prospect of rising inflation. US Treasuries, whose value is eroded by higher inflation, continued to lose ground last week, leaving investors to debate when the sell-off will start seriously troubling equity valuations.

The 10-year break-even rate, a common marker of investors’ inflation expectations, hovered around 2.2 per cent last week, reflecting concerns that a looming $1.9tn stimulus package from the Biden administration, paired with continued loose monetary policy from the Federal Reserve, will eventually lead to stronger inflation.

Investors will get their next clue on Friday, when the US Department of Commerce releases its personal consumption expenditures price index for January. Economists forecast a 1.4 per cent year-on-year rise in the core index that strips out volatile food and energy prices, according to Bloomberg. That remains some way below the Federal Reserve’s 2 per cent inflation target.

In December, core PCE was running at 1.5 per cent.

While the core consumer price index, another measure of inflation, has already been released for January, showing a 1.4 per cent increase year-on-year, the PCE is the Fed’s preferred gauge of how much prices are rising. Data from the two markers, which are based on different surveys and calculations, have diverged in the past.

Fabiana Fedeli, global head of fundamental equities at Robeco, said Friday’s figure is likely to be “broadly stable”. A faster rise in April and May is more likely, she added, given that a year-on-year comparison for those months would take into account the economic conditions in the early months of the pandemic. Aziza Kasumov

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Is German economic sentiment on the upswing?

A key measure of morale among German households and companies — currently suffering one of Europe’s longest lockdowns — will be provided with the release of two widely tracked surveys this week.

On Monday, the Ifo Institute in Munich will issue its latest business climate indicator for the EU’s biggest economy, which economists expect to rebound from a seven-month low of 90.1 in January to hit 91.8 in February.

That will be followed on Thursday by the publication of the GfK institute’s indicator of consumer confidence, which is also likely to recover after hitting an eight-month low last month.

The nation’s economy was struck by a record postwar contraction of 5 per cent last year. The latest lockdown, which began in mid-December and has been extended until at least March 7, means the economy is set to undergo another contraction at the start of this year.

Deutsche Bank economists last week slashed their forecasts for economic output in Germany, predicting it would shrink 2 per cent in the first quarter and recover more slowly than expected with growth of 4 per cent over the full year.

“As in the second quarter of last year, the brunt of the lockdown will be felt in private consumption, in particular in dry goods retail and personal services,” the Deutsche economists said in a note to clients. 

However, they noted that consumer confidence was “holding up a bit better” than last year, helped by “more stable business cycle expectations and a more sanguine labour market assessment”. Martin Arnold

Can the Turkish lira continue its rally?

The Turkish lira has experienced a dramatic turnround this year, after a disastrous 2020, to become the world’s leading emerging market currency.

It has gained more than 6 per cent against the dollar in 2021, after plunging by a fifth last year. The resurgence followed a shake-up in November of the country’s economic management.

Some analysts think the rally, which has brought the exchange rate against the dollar to just below the closely watched TL7 level, has further to go, albeit at a slower rate than the runaway pace of recent months.

Phoenix Kalen of Société Générale predicts the lira will strengthen to 6.2 to the dollar by the end of the year.

The lira’s rally “can still be fuelled by other segments of market participants re-engaging in Turkish currency markets, and by gradual de-dollarisation from retail customers in Turkey,” she said.

Piotr Matys, an emerging market currency strategist at Rabobank, also thinks the lira can add to its gains. However, he expects some headwinds when the central bank begins buying foreign currency, as promised, to replenish its severely depleted reserves.

The big unknown is how long President Recep Tayyip Erdogan, a strong opponent of high interest rates, will be willing to tolerate the hawkish stance adopted by Naci Agbal, the new central bank governor, who has engineered the change in the lira’s fortunes. The central bank held the country’s main policy rate at 17 per cent last week.

“There is definitely a risk that Governor Agbal will be in a similar position to his predecessors, who were under tremendous pressure to ease monetary policy,” said Matys. “But I assume that it may not happen until early next year.” Laura Pitel

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