Last week, the annual inflation rate in the US accelerated to 5% in May of 2021 from 4.2% in April and above market forecasts of 4.7%. Furthermore, the Core consumer prices in the United States increased to 3.80% in May of 2021 over the same month in the previous year and from 3.0% in April. So far, the market participants are buying into the FED idea that this is just a transitionary, but that can change fast. Considering all the previous stimulus packages and that the Biden administration is preparing another stimulus package, an Infrastructure bill for 1.3$ trillion, and the FED ongoing 120$ billion of monthly bond purchasing, it is not difficult to anticipate the chance for overheating of the US economy.
The FED is increasingly under pressure for their ongoing QE program, some are arguing that the risks of continuing the QE are higher than the rewards. Perhaps, that is visible in the Repo market, where the imbalance for the financial system created by the FED is evidential. Last Wednesday’s The Federal Reserve’s reverse repurchase window took in $503 billion in cash, hitting a record peak for a third consecutive session.
During the press conference on Wednesday, June the 16th, FED will have to address the inflation concerns, the potential for overheating the US economy, and the calls for tapering their quantitative easing program. Any changes in the FED plans for QE tapering will cause volatilities in the markets.
Last week the ECB decided to continue its bond purchasing under the pandemic emergency purchase program (PEPP). `The Governing Council will continue to conduct net asset purchases under the pandemic emergency purchase program (PEPP) with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over. Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects net purchases under the PEPP over the coming quarter to continue to be conducted at a significantly higher pace than during the first months of the year.`
Bank of Canada also left their monetary policy unchanged in their interest rates decision last week. `The Bank of Canada today held its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance on the path for the overnight rate. This is reinforced and supplemented by the Bank’s quantitative easing (QE) program, which continues at a target pace of $3 billion per week.`
Next week the markets will receive, the latest inflation numbers from the UK, Canada, and Japan and the retail sales from the US, UK, and China. However, all eyes are on the Fed interest rate decision, FOMC Economic Projections, and the Fed press conference on Wednesday, June the 16th, 2021.