Good News: Inflation May Have Peaked

Inflation Good News

At the close of business last Friday, global equities in North American and Asian equities were lower on the week while European equities made gains. The US 10-year Treasury note fell from its intra-week high of 3.20% to  2.90% on Friday. The price of a barrel of West Texas Intermediate crude oil changed little from a week ago, coming in at $108.60. The Cboe Volatility Index (VIX) fell to 30 from 33 last Friday.



Crypto News

The plummeting price of cryptocurrencies has raised financial stability concerns. Whether they represent a systemic risk is particularly difficult to determine, given the opacity of the currencies, high leverage associated with them, the lack of regulation them, or even a defined jurisdiction under which they fall (with the jurisdictional problem making it unlikely that a lender of last resort will come to the rescue in the event of a black swan event). Contributing to the fall in prices was the disclosure this past week by one of the larger crypto exchanges that in the event of its bankruptcy, clients could be considered unsecured creditors of the broker as their funds are not kept separate from the firm’s, like with a securities brokerage account.

Regarding stablecoins—part of the financial infrastructure of the crypto market—the US Federal Reserve warned this week in its Financial Stability Report that the coins could become illiquid or lose value in times of stress. That proved prescient as TerraUSD, a token meant to trade at a constant $1, fell to $0.30 on Wednesday, the same day that US Secretary of the Treasury Janet Yellen again called on Congress to authorise the regulation of the coins. On Thursday, Tether, an $80 trillion stablecoin, also broke the buck.

Our outlook for the markets going forward:

It’s important to keep in mind that corporate and consumer balance sheets remain strong, and inflation is expected to moderate as supply chains untangle and reorient. It is always difficult to call the bottom. However, we saw a huge rally on Friday and futures are indicating another strong rally is setting up for Monday.



Gas prices are continuing their rise to new highs. In Vancouver, we are told to brace for as much as $2.34 per litre at the pumps for regular gas. Even with these soaring prices nearly seven in ten Canadians say they are not interested in taking public transit. What we are seeing is a higher level of interest in electric vehicles.

With inflation at a 31-year high, we hear that many of us are cancelling major purchases.



Fed Chair Jerome Powell reiterated that 50-basis-point rate increases at the June and July FOMC meetings will remain appropriate if the economy performs about as expected. He also said 75-basis- point hikes are not under active consideration, though the Fed will do more if needed. The central bank aims to achieve a soft landing.



The European Central Bank may raise rates as early as July. Several ECB officials signalled the need for an early rate move, and the market is now expecting policy rates to rise from today’s -0.5% to above 0% before the end of 2022.

We hear that the European Commission will propose a €195 billion plan to wean itself off Russian energy by 2027. The proposal is said to rely heavily on renewables and meeting energy savings goals such as reducing energy use by 13% of 2020 levels.



China’s yuan continues to fall and has touched a 19-month low against the US dollar. We think the Chinese government is going to let the yuan weaken further. This is good news for the Chinese export market which has suffered from a zero-Covid tolerance policy and a slowing economy.



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