The strategic alliance between the two firms will provide clients with unparalleled strategic
corporate services in highly disruptive environments
by Brunello Rosa
17 May 2021
Last week, US inflation data for April came in much higher than expected. For headline figures, the month-on-month (m-o-m) inflation rate increased by 0.8% in April, versus an expectation of a 0.2% rise, up from the 0.6% rise registered in March. The year-on-year (y-o-y) inflation rate in the US rose to 4.2% in April, up from 2.6% in March and well above market expectations of a 3.6% increase. In terms of core inflation, the monthly increase was 0.9%, versus the 0.3% expected and recorded in March. The yearly increase was 3%, versus the expected 2.3%, a notable acceleration from the 1.6% recorded in March.
Market participants got spooked, as the m-o-m increase in headline inflation was the highest jump since 2009, the y-o-y increase in headline inflation was the highest reading since September 2008, the m-o-m increase in core inflation was the largest jump since 1996 and the 3% y-o-y reading in core inflation was the highest since the mid-1990s. Is this fear justified?
The surge in inflation is due to the re-opening of the economy, which led to an increase in commodity prices, the emergence of bottlenecks in global supply chains (such as for semi-conductors and computer chips), and base effects, considering that in April 2020 the y-o-y inflation rate collapsed to 0.3% and oil prices became negative for the first time in their history. In fact, the biggest increases were recorded for gasoline (49.6% vs 22.5% in March), fuel oil (37.3% vs 20.2%) and used cars and trucks (21% vs 9.4%). Inflation slowed for medical care services (2.2% vs 2.7% in March) and food (2.4% vs 3.5%).
So, it seems that inflation will exhibit, in the US, some high inflation readings for the next few months, until the situation stabilises, in terms of supply, demand, commodity prices and base effects.
Should we worry about a persistent rise in inflation? For that to happen, we should observe a rapid increase in wages, following a closure of the output gap and the economy reaching full employment.
It does not seem we are there yet. In April, non-farm payroll rose by “only” 266K, versus the 1 million expected (one of the largest misses ever recorded), a marked deceleration from the 770K record in March (downwardly revised from 916K). The unemployment rate, instead of decreasing further to 5.8% as expected, instead rose from 6.1% from 6.0%, perhaps as a result of the increase in the labour force participation rate, to 61.7% from 61.5%. Crucially, the yearly increase in average weekly earning fell from 4.2% to 0.3% .
Now, it is possible that inflation will accelerate further as the output gap closes, as discussed in our recent analysis on US inflation. But we do not think inflation will start haunting us just yet. And even if it does, central banks will be cautious in withdrawing monetary accommodation as long as the pandemic lasts and economic activity needs to recover previous losses. In this respect, the Fed – even recently - was adamant in excluding the possibility that it will react to rises in inflation that are considered transient.
Market participants seem to get this point: early last week, equity prices suffered the steepest selloff since October, but recovered most losses on Thursday and Friday, as buyers rapidly stepped back into the market. In the week ending May 12, US stock funds drew the most inflows since March. In the fixed income space, Eurodollars futures prices don’t fully price in a rate increase before 2023 at the earliest. As a result, the 2y yield is around 0.15% (in the middle of the 0-0.25% Fed funds target range). Further down the curve, the 10y US Treasury yield remains close to 1.60%, after the surge recorded from August 2020 (when it touched 0.5%) and March 2021 (when it surpassed 1.7%).
In the currency space, the USD remain week versus the EUR (with EUR/USD at 1.21) and has weakened versus the CAD, NZD, and AUD recently. So it seems that the market is understanding the Fed’s reaction function.
In the medium term, the situation may change, and as Nouriel Roubini recently wrote, the risk of a new era of stagflation over the coming decade is a real possibility.
by Giorgio Cafiero
12 May 2021
by Brunello Rosa and Fawaz Sulaiman Al Mughrabi
6 May 2021
by Brunello Rosa
28 April 2021
by Alessandro Magnoli Bocchi and Fawaz Sulaiman Al Mughrabi
5 May 2021
by Brunello Rosa
22 April 2021
by Mirko Giordani
8 April 2021
Subscribe to receive our free weekly Viewsletter "Making Sense of This World"
by John Hulsman
4 May 2021
Introduction: The Ghosts Of 1961
They could see which way the wind was blowing; although Algeria had been politically part of France since 1848, Charles de Gaulle—who in their mind had been resurrected by the fractious army in 1958 to restore French grandeur—was about to surrender Algeria to local anti-colonialists in the National Liberation Front (FLN). Already, to pave the way, de Gaulle had organized and won a referendum on the matter in a January 1961 plebiscite, wherein a decisive 75 percent of the overall French population (and significantly 70 percent of Algerians) favored self-determination for the restive colony.
Secret negotiations over the terms of independence between the French government of Prime Minister Michel Debre and the FLN were well advanced. Four retired, right-wing generals (including Raoul Salan, former Commander-in-Chief of French Algeria) could clearly see the writing on the wall; de Gaulle was preparing France to jettison bleeding Algeria, then in the midst of a bloody civil war and independence struggle.
For them de Gaulle’s actions were unendurable, both in terms of policy (winding down centuries of French imperialism) and as a personal betrayal. The generals, in making a last desperate throw of the dice, organized what became known of the Generals’ Putsch of April 21-26, 1961, hoping in two stages to first re-take Algeria, and then unseat de Gaulle through the use of military force in metropolitan France itself.
While the generals managed the partial takeover of Algeria (including the capital Algiers) their insurrection proved a non-starter in the rest of the country. Quickly alerted by the first-rate French intelligence services as to what was afoot, de Gaulle responded decisively. Though well past 70, the French President donned his old, storied, World War II uniform, and won the public relations battle for the soul of France. The transistor radio was a new, and popular, invention, and de Gaulle’s stirring radio address against the coup directly reached the ears of French conscripts serving in Algeria, many of whom refused to follow the plotters’ orders. Within days, the coup collapsed on its own steam, with only one casualty being recorded.
But, for all that it amounted to a decisive failure, the role that right-wing elements of the French army had played in the insurrection continues to haunt the country. Salan, then on the run, help found the OAS, a terrorist, paramilitary organization which spent much of the 1960s trying to assassinate de Gaulle, very nearly succeeding on at least one occasion. The army’s direct role in politics – and in extra-constitutional violence to secure right-wing ends – make France an anomaly amongst the other advanced, industrial G-7 nations.
But then, unlike most of the developed world, France has always moved through history not via the placidity of political evolution, but rather through the dramatic lurch of revolution, as the country continues to eye-catchingly over-correct its political failings.
All of this real-world historical tumult provided the ideal backdrop for Frederick Forsyth’s great spy thriller, The Day of the Jackal, which takes the historical near miss of the OAS Paris assassination plot of Lieutenant-Colonel Jean-Marie Bastien-Thiry as its starting point. While the story from then on is purely apocryphal, the notion that the future stability of France hung by a thread perfectly encapsulates the sense of those uncertain times.
That is why my first reaction upon hearing of the extraordinary open letter in Valeurs Actuelles, a contemporary right-wing news magazine, was simply, ‘The Jackal is back.’ Initially penned by an obscure former Captain of the gendarmerie, Jean-Pierre Fabre-Bernadac, now 70, the letter has created a sensation. Twenty retired generals (amongst 20,887 former soldiers, who have signed it as of Sunday) have created a political tsunami, calling for ‘a military takeover’ if besieged President Emmanuel Macron fails to halt the ‘disintegration’ of the country at the hands of Islamists.
Their charges carry even more popular resonance following the recent stabbing and death of a 45-year-old French policewoman in Rambouillet, a Parisian suburb, by a Tunisian-born Islamist.It is clear that the timing of the letter was not an accident, as the ghost of the French army’s historical right-wing extra-constitutionalism was clearly invoked, by the letter being released on the 60th anniversary of the General’s Putsch, underlying the seriousness of the missive. However, a coup itself remains highly unlikely. Fabre-Bernadac himself put it perfectly, “If we were planning one (a coup), do you really think we’d announce it first?”
However, and more importantly, the most recent political rising of this gilets khakiscould indeed portend a revolution that would upend both France itself as well as the European Union. An increasingly embattled Macron finds himself surrounded by a host of enemies (the retired army veterans, the gilets jaunes provincial populists, and the far-right National Rally Party (RN)) who, if they unite together under the banner of rising Marine Le Pen, may well have it in their power to upend the Fifth Republic itself. So, while a coup remains unlikely in France, ironically a political revolution is much more probable (although still a risk scenario, rather than our baseline).
(This is an excerpt of Dr. Hulsman's latest article, which you can read here)
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com.
Week: 17 - 23 May 2021
US, EZ And Japanese Manufacturing PMI Expected To Remain Stable
In the US, in May: i) manufacturing PMI is likely to remain stable at 64.7 (p: 64.0); while ii) services’ PMI is likely to decelerate slightly to 59.8 (p: 60.5).
In the EZ, in May: i) manufacturing PMI is expected to remain unchanged at 62.5 (p: 62.9); while ii) services are expected to increase to 52.0 (p: 50.5).
In Japan, in May: i) manufacturing PMI is likely to remain stable at 53.3 (p: 53.6); and ii) services PMI is likely to rise slightly to 50.0 (p: 49.5). GDP growth is expected to decline: 1)in Q1-2021, to -1.2% q-o-q (p: 2.8%); and 2) annualized, down to -4.6% (p: 11.7%). April’s core-CPI inflation rate is expected to decline further to -0.2% y-o-y (p: -0.1%), while the inflation rate is expected to increase to 0.1% y-o-y (p: -0.2%).
US Moves Closer To Post-COVID-19 Reopening, Inflation Under Tight Scrutiny
Globally, over the next couple of years, if supply fails to keep pace with demand, core inflation is likely to remain elevated. However, a rebound in inflation is more likely in the US than in Europe or Japan, driven by the ‘Biden fiscal stimulus’.
In the US, teenager vaccination starts, while fully vaccinated individuals can stop wearing masks. Last week, the ‘Center for Disease Control and Prevention’ (CDC) authorized usage of Pfizer and BioNTech’s Covid-19 vaccines for 12- to 15-year-olds. The US started the world’s first mass teenager inoculation effort, and President Joe Biden described it as “one more giant step in our fight against the pandemic.” In the meantime, the CDC announced that fully vaccinated Americans may stop wearing masks or maintaining social distance in most indoor and outdoor settings.
In the EZ, growth and inflation are likely to overshoot expectations.
In the UK, fears continue to grow over virus mutations. UK Public Health data show that India's COVID-19 variant (B.1.617.2) makes up between 40% and half of all cases detected in London. Prime Minister Boris Johnson warned “the country’s lockdown easing plans may have to be delayed due to the emergence of the variant” and a surge of infections.
Israel’s conflict with the Palestinians intensified, as: 1) bombardment of Gaza extended into a seventh day; 2) across the occupied West Bank, mass protests intensified; and 3) communal riots worsened in several cities. The Biden administration’s envoy Hady Amr flew into Israel on Friday, with an aim “to work toward a sustainable calm”.
Real Economy: COVID-19 Variants Pose Downside Risks To Global Activity. CBs On Hold
In the US, April retails sales increased by 51.20% y-o-y (p: 29%), the biggest annual increase on record, mostly due to low base effects from last year. Concomitantly, export prices rose by 14.4% y-o-y (p: 9.5%) and import prices increased by 10.6% (p: 7.0%). In April: 1) core-CPI inflation rate rose by 3.0% (p: 1.6%), the largest annual increase since January 1996; and 2) CPI inflation increased by 4.2% y-o-y (p: 2.6%), due to: i) a surge in demand, soaring commodity prices and supply constraints - as the economy reopens; and ii) a base effect (April 2020 CPI: 0.3%), as the coronavirus pandemic dented last year’s economic activity.
In the EZ, March’s IP surged by 10.9% y-o-y (-1.8%).
Financial Markets: Volatile Stocks End The Week With Losses; Bond Yields Rise; USD, Oil And Gold Rise
Market drivers: Global stocks experienced the worst week since February, as investors suffered: 1) a ‘US inflation scare’; and 2) fears of tighter CB policy. After April data showed that consumer prices jumped to a 13-year high, stocks suffered the steepest selloff since October, but recovered most losses on Thursday and Friday, as buyers rapidly stepped back into the market: in the week ending May 12, US stock funds drew the most inflows since March.
Global equities: fell w-o-w (MSCI ACWI, -1.6%, to 699). In the US, the S&P 500 Index fell (-1.4%, to 4,174), starting the week with the worst three-day loss in nearly seven months. Investors fled the fast-growing (mostly tech) companies that many had favored over the past year. In the EZ, European stocks remained flat (Eurostoxx 50, -0.4%, to 4,017).
Fixed Income: w-o-w global bonds fell slightly (BAML Global, -0.4% to 291.4) and UST yields rose (+6 bps, to 1.64%) as investors sold USTs on inflation worries.
FX: w-o-w, the USD weakened (DXY, +0.1%, to 90.321; EUR/USD -0.2%, to 1.214), on concerns due to weakening growth and accelerating inflation.
Commodities: Oil prices rose (Brent, +0.6% to 68.7 USD/b), after a key US fuel pipeline reopened - after being shut down for days in response to a ransomware attack. Gold edged higher (+0.6% to 1,842 USD/Oz) on a USD pullback, though gains were curbed by fears of a sooner-than-expected rate hike, due to data showing a rise in US inflation.
Copyright © 2017 - 2021 Rosa & Roubini Associates - All Rights Reserved.
Rosa & Roubini Associates Ltd is a private limited company registered in England and Wales (Registration number: 10975116) with registered office at 118 Pall Mall, St. James’s, London SW1Y 5ED, United Kingdom.