Inflation-induced US dollar rally ends

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The European Central Bank (ECB) and the Bank of Japan (BoJ) remain the only central banks among major developed markets that have yet to raise their respective benchmark rates, although it is likely that the ECB will do so this month.Closer to home, both the Bank of Thailand and Bank Indonesia are the two South-East Asian nations that have yet to raise rates.

AT the time of writing, the Bloomberg Commodity Index (BCOM), which tracks 23 exchange-traded contracts on physical commodities, was last observed at US$111.72 (RM496.85).

Although still up 12.7% year-to-date and not in a bear market just yet, selected commodities are well off the peaks, as we have seen among several industrial metals, energy, agriculture produce like grains and other soft commodities, which are down by between 15% and 58% from their recent peaks.

What does this mean to investors as the global economy grapples with recession fear at a time when central banks are ultra-hawkish and determined to bring the inflation rate down by merely raising interest rates?

First of all, we can all agree that other than several central banks that were seen to be ahead of the curve in terms of raising interest rates from record lows or taking preemptive measures against rising inflationary pressure, especially the Bank of Korea (BoK) with a rate hike in August last year and the Monetary Authority of Singapore’s (MAS) move to raise slightly the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band in October last year, the Federal Reserve (Fed) missed the boat.

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The Fed wrongly interpreted the inflation prints that it was seeing, even as early as April 2021 when the core personal consumption expenditure (PCE), which is the Fed’s favourite inflation gauge, jumped to 3.1% from 2% in the preceding month.

Since then, the core PCE was only going up north and hit a high of 5.3% in February. However, the core PCE has eased since then and in May, the pace of increase has been slower and was last seen at 4.7% year-on-year growth.

Judging by the Fed’s guidance of 4.3% for the year, core PCE would have to average just under 3.8% over the next seven months to achieve the Fed’s full-year target.

While the Fed has raised some 150 basis points (bps) since its first lift-off, and the market is still expecting the Fed to continue to be aggressive over the next four remaining meetings, the headline June consumer price index of 9.1% – which was the highest in 41 years – and the core inflation print of 5.9% had even increased the bets of a full 100 bps hike by the Fed.

The past week has also been busy for many central bankers as the Bank of Canada took out the bazooka with a 100 bps hike while the Philippine central bank raised its benchmark interest rates by 75 bps unexpectedly.