One down, another to go tonight in the campaign by Federal Reserve chair, Jay Powell to assure Congress and markets that the current spurt in inflation won’t be long-term.
Power gave his semi-annual testimony to the US House of Representatives banking and finance committee on Wednesday and backs up tonight with an appearance before the Senate’s key finance and banking committee.
Judging by the slide in US bond yields on Wednesday – in the face of a surge in Producer Price Inflation to a new high of 7.3% – Powell succeeded in keeping a lid on the panic among the House Committee Republicans in particular about rising costs.
The yield on the key 10-year bond fell to around 1.35% from 1.43% the day before in a sign that bond investors remain believers in the inflation is ’transitory’ story from the Fed (and in Australia, the RBA).
Yesterday saw one of those believers – the Reserve Bank of NZ lose that belief and blink by announcing the end of a key stimulatory measure next week – no slow taper for the Kiwis.
The prospect of rising inflation caused the Reserve Bank of New Zealand to blink and start tightening money policy by dropping its $NZ100 billion bond buying scheme.
NZ’s move and the reasons for it failed to rate in yesterday’s Congress discussion with Chairman Powell.
That’s despite a record rise in US producer prices (the PPI) in June – up 1% in the month or an annual 7.3% as the prices of a series of one-off items such as soaring prices for car parts and retailing costs.
Powell said he was confident recent price hikes are associated with the country’s post-pandemic reopening and will fade, and that the Fed should stay focused on getting as many people back to work as possible.
Any move to reduce support for the economy, by first slowing the US central bank’s $US120 billion (tapering) in monthly bond purchases, is “still a ways off,” Powell told Congress.
Unlike NZ and Australia where employment is now back above pre-Covid levels, the number of people employed in the US is still more than 6 million under the February, 2020 level.
“The high inflation readings are for a small group of goods and services directly tied to the re-opening,” Powell said (a view shared here by RBA Governor, Philip Lowe).
The 5.3% annual surge in consumer prices in June reflected that temporary nature, thanks to rising prices for used and new cars and the same was reported in in the producer prices measures.
The report showed that 20% of jump in the June PPI came from a 10.5% jump in costs associated with cars and car parts retailing.
Economists said that 70% of the increase came from trade services, which were up 2.1%, and not manufacturing costs.
Stripping out volatile food, energy and trade prices, the core PPI rose 0.5%, in line with estimates and down from the 0.7% rise in May. Still the core PPI was up an annual 5.5%, the highest reported since the series started in 2014.
Once again the nervy bond market believed Powell, pushing down yields.
Yields on 10-year Treasury bond traded a touch lower in early Asian dealings at 1.345% after the big fall earlier in the US session.
The Aussie dollar was around 74.80 US cents in early Asian trading.
Wall Street was spotty – the S&P 500 ended at a new high but the Nasdaq stuttered.
Apple shares hit a new high in trading with reports of forecasts for a jump in iPhone sales later this year and into 2022.
Bank stocks weakened despite another round of solid headline profits (thanks in part to the return of more of 2020’s loan loss set asides).
Analysts picked up weak revenues, falling net interest income and wobbly net interest margins in the results.
