A few things

We know how the Germans feel about inflation because of their history with it but Mario Draghi and his path down negative rate lane and massive QE made the Bundesbank irrelevant. Now that the country, along with all others, are feeling the inflation heat, we’ll see to what extent there is more vocal pushback on the policies of the ECB. The head of the Bundesbank Jens Weidmann yesterday in an interview with Handelsblatt said “When the emergency for which the PEPP was created is over, it must be ended.” I’m not clear what the current emergency is but Weidmann is at least making his stand public, even though with seemingly kid gloves. He also said “With further progress in coping with the pandemic, hopefully the crisis related special measures will soon be reduced.” With the EU now ending travel restrictions for US citizens, can the ECB really continue to run their emergency purchase program until its stated end of March 2022?

Weidmann’s comments come a day before Germany said its producer price index for May rose 1.5% m/o/m, more than double the estimate of up .7% and after an .8% increase in April, a .9% rise in March, a .7% gain in February, a 1.4% spike in January which came after an .8% rise in December. If you annualize these 6 months, we are talking about a 12.2% annualized rate of gain. The German 10 yr yield did jump by 5.5 bps yesterday but are down 1 bp today at -.20%. The German 10 yr inflation breakeven is lower by 1 bp at 1.30%. The euro is up slightly after the prior two days of Fed induced selling that took the 7 day RSI to the lowest since February 2020, thus making it very oversold.

The Bank of Japan did nothing unexpected but Governor Kuroda remains obsessed with his yet to be attained 2% inflation target, 8 years later. “In Japan, inflation had not reached 2% even before the pandemic. As such, we must continue with our ultra loose monetary policy even after the pandemic subsides, in order to achieve our 2% inflation target.” The establishment, bureaucratic thinking is tough to break as when something doesn’t work, the answer is always to just do more of it. There is NEVER any self reflection and change of course. Achieving sustainable 2% inflation in Japan would be catastrophic for them as rates would spike and an aging population would see real wages drop sharply.

Anyway, luckily for the populace and the JGB market inflation is still muted but purposely to an extent as the government has encouraged lower prices for cellphone charges. They would be running .5-.6% more without this. Japan reported today May CPI which fell .2% y/o/y ex food and energy. The gain ex food was up .1% with the help of higher gas prices. Also keeping a lid on prices are the continued selective Covid restrictions that is impacting people’s social lives. Both were one tenth more than estimated. With respect to market expectations of inflation in Japan, they remain low at .31% but that is just off the highest since December 2018.

I forgot to mention yesterday that on Wednesday night the Brazilian central bank hiked rates by 75 bps as expected to 4.25%. They said “At this moment, the Copom’s (monetary committee) baseline scenario indicates, as appropriate, a normalization of the policy rate to a level considered neutral…For the next meeting, the Committee foresees the continuation of the monetary normalization process with another adjustment of the same magnitude. However, a deterioration of inflation expectations for the relevant horizon may require a quicker reduction of the monetary stimulus.”

Talk about night and day with what we heard from Powell this week and Lagarde last week.