Three “Data” items today:
Topic #1: European sovereign debt is having a bit of a “Taper Tantrum”. The European Central Bank is treading a similar path to the US Federal Reserve, if at a somewhat slower pace. Last Thursday, President Lagarde refused to rule out hiking interest rates this year. Over the weekend the Dutch central bank head said he would be in favor of raising rates this year to stem inflationary pressures. Markets have taken these messages to mean that the ECB will end its net purchase of bonds sooner rather than later.
This potential change in ECB policy has hit some of the region’s sovereign debt harder than others:
- German 10-year bunds currently yield 0.23 percent, up 22 basis points from a week ago.
- French 10-years yield 0.67 pct, up 24 bp from a week ago.
- Portuguese 10-years yield 1.0 pct, up 35 bp from a week ago.
- Spanish 10-years yield 1.10 pct, up 37 bp from a week ago.
- Italian 10-years yield 1.81 pct, up 44 bp from a week ago.
- Greek 10-years yield 2.49 percent, up 60 basis points from a week ago.
For readers who were investing in the early 2010s these relative changes in European sovereign yields will seem familiar. They correlate with debt/GDP percentages, which were a much-discussed issue during the 2011 Greek debt crisis. Spain, Portugal, Italy and Greece all have debt/GDP levels over 100 percent. Germany runs at 70 percent. France is also over 100 percent, we would note, but it is such an integral part of the “European experiment” that it is essentially too big to allow to “fail”. It also does not help that the economies of countries at the epicenter of the current “tantrum” also rely on tourism, which continues to be hard hit by the pandemic.
Takeaway: it’s too early to say how much the backup in peripheral European sovereign debt yields will have on investor confidence in the region, but the action over the past week is clearly a warning shot across the ECB’s bow. They face a similar challenge to the Federal Reserve in terms of responding to inflation, but the Eurozone’s economic structure is quite different and more complex than that of the US.
Topic #2: The latest global ETF fund flow data from the World Gold Council shows investor interest in the yellow metal remains a fulcrum issue for the future direction of gold prices.
This WGC chart shows weekly inflow/outflows for gold ETFs around the world since the start of 2020 along with gold prices, and the relationship is unmistakable. US ETF flows (purple) were the largest swing factor in both 2020 (to the upside) and early 2021 (to the downside). European gold ETF flows (green) played a supporting role during this period. Asian demand (red) is less often a factor but does look to have had some effect at the end of last year.
Takeaway: the rightmost part of the chart shows that US gold ETF flows have bounced back sharply in recent weeks, but so far other regions are not following that lead so it is hard to get too bullish on the commodity here. Recent history (especially 2020) shows it takes more than just American investor demand to push prices higher.
Topic #3: Ahead of Thursday’s US Consumer Price Index report for January, let’s look at used vehicle prices courtesy of the Manheim Used Vehicle Index. This tracks the prices for late model used vehicles sold at dealer auctions around the country. We’ve been looking at used car prices since the early 1990s, and never would we have thought that they’d get as much attention as they have. The problem, of course, is that persistent chip shortages have limited new vehicle production so used car demand has been very strong. And, as the old saying goes, “you can’t make used cars” so supply is virtually fixed in the near term.
Used vehicle prices have been a key driver of overall CPI inflation, with this category adding 1.3 points to headline inflation of 7.0 percent and 1.6 points to core inflation of 5.5 percent (December 2021 report). Put another way, used car prices are responsible for 19 – 29 percent of all the inflation the Federal Reserve and markets are so worried about.
Here are the last 6 months of annual used car inflation according to the Manheim data:
- August 2021: 19 percent
- September 2021: 27 pct
- October 2021: 38 pct
- November 2021: 44 pct
- December 2021: 47 pct
- January 2022: 45 pct
Takeaway: used vehicle prices should not be a source of marginal inflation in January’s CPI report, because on an annualized basis they are a touch lower than last month. That’s not to say the CPI report will be cooler than expected; there are many categories (food, shelter) with easy comps to last year where inflation will be an issue.