How Long is Transitory?

Macro Highlights

•    The preliminary June PMI and the Bank  of England meeting are the chief economic events in the week ahead.
•    The central banks of Hungary and the Czech Republic meet and are expected to hike key rates.
•    A bank survey found that more than 70% of the asset managers surveyed think price pressures are transitory. It also found that bond allocation fell to three-year lows.
•    In its short history, Bitcoin has mostly moved inversely to US CPI. 
•    Gold also does not have a significant correlation to US inflation.
•    Inflation expectations have often been driven by oil prices, which have practically doubled since last October.  Such appreciation has been a harbinger of economic downturns in the US.
•    Although officials are not defining “transitory”, the market is and it sees inflation and growth near a peak.  

The Bank of England meeting on June 24th finishes this round of major central bank meetings.  At its last meeting, Bailey & Co reduced the weekly bond-buying.  The extension of social restrictions well into July provides added reason to be cautious, though economic activity is accelerating and consumer prices are rising faster than the medium-term target of 2% for the first time in three years.   

British growth is likely peaking this quarter, perhaps a little above 4%. It would put H1 21 growth around 2.6%.  The pace of activity is likely to slow to around 2% in H2.  Growth in H1 22 may be closer to 1.5%.  Return to normalcy, indeed!

The same can roughly be said about the US as well.  The quarterly pace and the year-over-year increase are expected to peak here in Q2 21 also.  Both the Atlanta and St.Louis Fed tracking GDP models see Q2 GDP at a little more than a 9% annualized rate.  The slowing, however, will be moderated by the mid-July start of two new initiatives designed to help lower and middle-class families: the Child Tax Credit (~36 mln families qualify) and the Earned Income Tax Credit that will run at least through December. As a result, above 3% growth may be achievable into early 2022, but by H2 22 and the mid-term election, growth is likely to return to the status quo ante below 3%.  

Marc Chandler

Managing Director
Bannockburn Global Forex
www.bannockburnglobal.com