Reflation goes abroad

As the recent collapse in US bond yields, and the flattening of the term structure continues, the reflation thesis might have peaked, with slower growth in the US, limiting supply pressure, as demand eases. But looking abroad, particularly in Asia, there is a lot of evidence that the reflation experienced in the US is still ongoing. 

Japanese producer prices were 5% higher y/y in June, highlighting the supply constraints in Asia, as the chip shortage and rising commodity prices continued to pressure manufacturing costs. Asian stocks continued to rally on early Monday, likely pushed higher by the prospects of low yields on the US bond market. China may also have peaked in terms of economic reflation, but the Chinese central bank, PBOC, has cut reserve requirements by 1 trillion yuan over the weekend. The policy will lower borrowing costs for the board Chinese economy.

Inflation data will be released tomorrow for Germany, France and the US for the month of June. Previous US inflation reached 5% y/y. A decline in inflation will comfort the Fed’s ‘transitory’ inflation scenario.