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Markets fall ahead of inflation data

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US consumer prices for May are forecast to have risen at their quickest pace since 2008 as the world’s top economy sees an explosive recovery. AFP

Markets fall ahead of inflation data

Markets mostly fell in Asia on June 8 as investors awaited the release of key US inflation data later in the week, with another strong reading likely adding pressure on the Federal Reserve (Fed) to begin reconsidering its ultra-loose monetary policy.

Equities around the world are sitting close to record or multi-year highs after a stellar rally lasting more than a year, fuelled by central bank largesse, vast government stimulus worth trillions of dollars, the rollout of vaccines and easing lockdowns in major economies.

But there is an increasing fear that the explosive recovery in the US will send prices rocketing and force the Fed to wind back its market-supportive measures to prevent overheating, such as lifting interest rates.

Treasury secretary Janet Yellen stoked those expectations at the weekend when she said that while any spike in prices caused by Joe Biden’s proposed $4.0 trillion aid plan would be short-term, higher borrowing costs would actually be welcomed after a decade of low inflation and rates.

“When the [Fed policy board] will begin tapering its asset purchase programme is still front and centre for market participants,” said Kim Mundy at Commonwealth Bank of Australia, adding that officials would likely begin discussing a wind-down of their bond-buying programme in July or September.

June 10’s data is expected to show consumer prices jumped 4.7 per cent last month, which would beat April’s figure and be the highest since 2008.

“Even if the upcoming inflation report later this week doesn’t show a significant deceleration in pricing pressures, it probably won’t change anyone’s opinion on inflation at the Fed,” said Edward Moya at OANDA.

“Wall Street should see investor demand improve for safe-havens such as gold, as global tax and inflation concerns intensify.”

After a tepid lead from Wall Street, Asian markets struggled.

Tokyo finished in the red as traders brushed off news that Japan’s economy shrank less than estimated in the first three months of the year.

There were also losses in Shanghai, Seoul, Singapore, Taipei, Mumbai, Bangkok and Jakarta. Hong Kong was flat, while Sydney, Wellington and Manila saw gains.

London and Paris rose but Frankfurt edged down.

Still, BlackRock Investment Institute strategists led by Elga Bartsch remained upbeat, writing: “We advocate looking through near term market volatility and remain pro-risk, predicated on our belief that the Fed faces a very high bar to change its easy monetary policy stance.”

Analysts said there was little reaction to news that Group of Seven (G7) finance ministers had endorsed a global minimum corporate tax rate of at least 15 per cent, with their focus on tech giants and other multinationals.

“The reality is that this was well flagged as much as a fortnight ago,” soon after President Biden publicly endorsed the 15 per cent figure, said National Australia Bank’s Ray Attrill.

“Plus there is awareness there is still a long way to go before a deal is inked at the broader G20 [Group of 20] – or much broader OECD [Organisation for Economic Cooperation and Development] – levels and where the likes of Ireland with its 10 per cent tax rate may yet prove to be a thorn in the side of securing a global agreement.”

He added that acceptance of the levy could even be seen as a “result” if it meant an end to Biden’s plan for a hike in corporation tax from 21 per cent to 28 per cent.

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