Rising inflation undermines asset valuations

<p>Kia ora,</p><p>Welcome to Thursday's Economy Watch where we follow the economic events and trends that affect New Zealand.</p><p>I'm David Chaston and this is the International edition from Interest.co.nz.</p><p>Today we lead with news the reflation trade is back.</p><p>We start today with a major surprise. Inflation is rising much faster in the US than observers had anticipated. In March it rose at the +2.6% rate and nicely above the US Fed's target. Analysts had expected it to rise further to +3.2% in April. But <a href="https://www.bls.gov/news.release/cpi.nr0.htm" target="_blank"><strong>in fact</strong></a> it has come in at a +4.2% rise from a year ago, a very much faster rise than almost anyone anticipated (except the hindsight analysts). It's their biggest jump since 2009 and the highest since 2008. Energy and transportation costs did the damage in April. Interestingly medical care, food, and rents all only rose a bit over 2% and all restrained the jump.</p><p>Bond yields jumped. Equity markets fell. The US dollar strengthened.</p><p>The US Treasury released its <a href="https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0421.pdf" target="_blank"><strong>monthly budget update for April</strong></a> overnight. After a huge -US$660 bln deficit in March, the April -US$226 bln shortfall looks positively tame. Over the past twelve months this deficit is -US$3.6 tln (-16.2% of GDP) but that is lower than the full year to March deficit of -US$4.1 tln (-18.6% of GDP). At least they now have things going in a positive direction.</p><p>The US Treasury <a href="https://www.treasurydirect.gov/instit/annceresult/press/preanre/2021/R_20210512_2.pdf" target="_blank"><strong>auctioned US$63 bln of 10yr notes</strong></a> today. They got US$123 bln in bids. US$23 bln was reserved for the Fed. The median yield was 1.63% pa at this event, up from 1.47% pa at the same (but smaller) <a href="https://www.treasurydirect.gov/instit/annceresult/press/preanre/2021/R_20210310_2.pdf" target="_blank"><strong>auction a