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May 04, 2021

Good morning. India's coronavirus outbreak continues to worsen, another update is coming on the chip shortage and relations with China are in focus. Here's what's moving markets.

Complacency and Reopening

Indian Prime Minister Narendra Modi continues to resist calls from top business figures and world leaders to lock down the country, which is contending with the world's worst Covid-19 outbreak. Its former central bank governor said the new surge in infections shows complacency after the first wave. Other developing nations are also facing a spike in cases. In contrast, Europe is making meaningful steps towards a return to normality, with plans to open its borders after months of pandemic-induced restrictions. Airline and travel groups in the U.S. and the U.K., meanwhile, are pushing for travel restrictions to be lifted between the two countries. The New York region is set to see curbs end too.

Chip Shortage

The global semiconductor shortage remains at the center of investor concerns, weighing on equities at the start of the week as it ate into U.S. manufacturing growth. The chief executive of Intel said over the weekend the shortage may persist for a few more years. Ford's plants in Germany are facing lengthy outages because of the problem. Supply delays also showed up in European factory data, with a record build-up of uncompleted orders and rising prices. European chip bellwether Infineon Technologies will provide another update on the issue when it reports on Tuesday.

International Relations

Ties between Europe and China appear to be quickly deteriorating again, with governments increasingly moving into line with the Biden administration's view on the standoff with China. U.S. and U.K. diplomats reaffirmed the two countries' relationship, while hitting out at China and Russia. Elsewhere, President Joe Biden's $4 trillion spending plan is now in the hands of Congress, with Biden said to be open to multiple ways to find a compromise and get his proposals passed. Whether this will make any headway in narrowing the U.S. wealth gap is another question.

Mixed Start

U.S. equity futures are marginally lower and European futures mixed following weakness among technology stocks on Wall Street on Monday, while the dollar rallied. Oil prices are holding onto gains, with WTI crude is still above $64 per barrel heading into Tuesday's session on optimism that economic activity getting back underway in the U.S. and Europe will underpin demand. Commodities prices, meanwhile, are mixed after hitting new highs as the same hopes of improving economies spur appetite for metals.

Coming Up…

The economic calendar remains busy early in the month, with manufacturing numbers from the U.K. plus factory and trade data from the U.S. later. Along with Infineon, we'll have updates from a couple of closely-watched companies that have benefited from pandemic-driven demand, meal-kit firm HelloFresh and remote access company TeamViewer. In the U.S., pharmaceutical giant and Covid-19 vaccine maker Pfizer will report, as its partner BioNTech hit a new record.

What We've Been Reading

This is what's caught our eye over the past 24 hours. 

And finally, here's what Emily Barrett is interested in this morning

To think, a little over a year ago we were talking about a deflationary spiral. Since then, the inflationistas have had the market megaphone, and they've made a pretty compelling case for worrying about prices getting out of hand, from several angles. A lightening-fast mobilization on vaccines has spurred economic reopening. Pent-up demand will be unleashed, with the full throttle of unprecedented government and central bank stimulus. That force is already starting to collide with supply constraints, due to strained supply chains. Commodities are pushing to multi-year highs, as are market-implied expectations of inflation. Just about everywhere you look, there are signs. Suddenly we're all talking about lumber prices, and housing markets from the U.S. to New Zealand are running hot.

But we've heard less from the secular-stagnationistas, shall we call them. That's the camp that sees weakening prices as the real challenge longer term, and they may seem a bit thin on the ground since their flagbearer, former Treasury Secretary Lawrence Summers, changed his tune. Guggenheim's Scott Minerd is still very much in that camp, judging by the title of the latest missive from his office, "The Coming Disinflation."

The central bank is looking through this year's price pressures because they are -- here's that word again -- transitory -- according to a note this week. Supply bottlenecks in manufacturing typically have only brief impact, and higher prices along with an improving Covid situation should bring more capacity on line by the end of this year. Moreover, the base effects that are artificially boosting price indexes this year (thanks to the initial shock of the economic shutdowns) will reverse in 2022, flouting the Fed's new goal to get inflation up to and above 2% on a sustained basis.

"Further inflation scares in the coming months that drive any bond selloff should be seen as a buying opportunity. Our analysis suggests that the secular disinflationary headwinds of the past few decades will ultimately prove more lasting than a rise in prices due to temporary supply shortages," wrote Brian Smedley and Matt Bush, economists with the firm's Macroeconomic and Investment Research Group.

The observation is timely, given the surprise undershoot in the latest ISM manufacturing surveys, which showed materials shortages strangling production and driving prices higher on both sides of the Atlantic. While the respondents quoted all seemed to feel the strain of mismatched supply and demand, at least one looked for a "more balanced" picture later in the year "as customers run hard to meet their demand and rebuild inventory."

Emily Barrett is a cross-asset reporter and editor for Bloomberg News in Melbourne.

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