Inflation, Inflation, Everywhere! Central Banks Even Acknowledge The Asset Bubble (Sort Of…)

Inflation pressures are popping up everywhere. And no wonder – consider the prices producers are now paying for raw materials.

Galloping inflation: Copper, steel, and iron surge to record highs

Copper reached an all-time high as well, with futures at $10,123 a tonne. It’s up 28.1% since the end of last year and is 114.9% from its 2020 low.

Analysts are now calling it the “new oil” and expect it to hit $13,000 in the following months.

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Prices of steel reached record highs as well, with iron ore following suit. The prices of the two commodities are naturally tied together.

Construction steel rebar jumped 4.7% to a record 5,672 yuan a tonne and hot-rolled coil jumped 4% to a record 5,957 yuan a tonne. Iron ore reached $200 on Friday, surpassing the all-time record of $194 in 2011.

Analysts blame Chinese demand which jumped 30% in the last 5 years. But steel is not the only commodity surging. Oil, lumber, copper, and microchips are all experiencing sudden “supply bottlenecks.” Are those really just a coincidence?

Easy money is the more likely culprit. As investors are expecting a “robust recovery”, everyone expects the Fed to eventually taper. But that’s easier said than done, as the taper will likely crush this zombie recovery.

Fed Acknowledges the Asset Bubble

Take the Bank of England, which is predicting a brighter outlook for the months ahead, has announced that it would reduce the value of bonds it buys each week to “just” 3.4 billion GBP in part due to the reality of inflation. However, just so investors wouldn’t worry too much….they made sure to point out that they’re still keeping interest rates at near-zero at 0.1%.

“This operational decision should not be interpreted as a change in the stance of monetary policy,” they said.

Incredible. If the economy is healing and the Central Bank predicts (as it does) 7.35% growth for the British economy, shouldn’t they consider moving rates higher?

Meanwhile, there’s evidence the Federal Reserve is slowly waking to the ballooning asset bubble.

In its semi-annual financial report, the Federal Reserve warned that rising appetite for risk is stretching valuations and “creating vulnerabilities in the U.S. financial system.” No kidding.

“The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event,” Fed Governor Lael Brainard, the head of the Board’s financial stability committee said.

They added that “in this environment, prices may be vulnerable to significant declines should risk appetite fall.”

Finally, the Fed acknowledges that the market is in a bubble. But the real question is, what will they do about it?

Nothing it seems, until it is too late. Isn’t this always the way with Central Banks?

Markets rebound, despite Fed’s report

And so the party goes on.

In trading on Friday, the S&P 500 climbed 0.67% at midday. The Dow Jones Industrial Average was up 0.43%. And, the Nasdaq Composite index jumped 1.08%.

Meanwhile, around the world, markets also saw upside with European stocks gaining 0.6% percent, Asia-Pacific gained 0.2% and emerging markets 0.3%.

As long as the Fed is providing easy money, the markets are not worried about “stretched valuations.”

Vaccine Stocks Rebound

Vaccine stocks were hit hard Thursday as Biden’s proposal to waiver on IP protections for Covid-19 vaccines reached the World Trade Organization. If the WTO General Council decided to accept it, vaccine manufacturers could lose billions.

Shares of biotech companies dropped significantly on the news but rebounded after German Chancellor Angela Merkel opposed Biden’s proposalModerna Inc. recovered gaining 1.81%.  CureVac NV gained nearly 6%, while BioNTech SE jumped 8.84%

Representatives of pharmaceutical lobbying groups claim that Biden’s proposal does nothing to address vaccine availability. The IP waiver would allow more companies to manufacture existing vaccines, which would increase supply and drive down prices. However, new vaccine production is likely to be less profitable.

Gold strengthens – Past $1800

Gold strengthened on inflation fears, up 0.2% to $1,829.11 an ounce.

Brent crude gained $0.03 trading at $68.31 a barrel at midday on Friday.

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