UK inflation surges to 40-year high

Eyewatering inflation numbers for the UK: CPI hit 9%, the highest in 40 years, and a huge +2.5% month-on-month. RPI rose by 11.1%, also a four-decade high. Producer price inflation rose to 14% on the year to April 2022, up from 11.9% in March 2022. And the pipeline does not suggest pressures are about to ease, with the price of materials and fuels used by manufacturers remained at a record high of 18.6% in the year to April 2022. Just as well we’ve got our beat man on the job … get that pay rise request in quick…Inflation is a regressive taxation on the poorest in society and the BoE is as much to blame as the Treasury for kindling inflationary policies without any plan to dial it back at the requisite moment. The Fed and US Treasury are similarly culpable, as is the ECB and co. The figures can be blamed on all kinds of external factors, from Ukraine to Chinese lockdowns, and we know the BoE is wont to ascribe blame to anything other than its own policies. But the fact is that the remit of the Bank is to keep inflation around 2% and it’s spectacularly failed to do that, and seems to have no plan whatsoever to try to fix things … except advise workers not to ask for a pay rise. Governor Andrew Bailey should be sacked for dereliction of duty and a more serious leader found.

Sterling is weaker this morning too after a solid three-day run against the dollar. GBPUSD trades at 1.2420 after running into horizontal round number resistance at 1.25, just finding a bit of support on the 23.6% retracement of the recent run.

Slow start for European equities this morning, with the major bourses struggling to build much on yesterday’s gains. Wall Street enjoyed a strong bounce on Tuesday, with the S&P 500 up 2% and the Nasdaq over 2.75% higher for the day. Walmart plunged as it raised its revenue outlook but dialled back its profit guidance…inflation plays coming to the fore. AMD rallied on an upgrade, lifting other semis, whilst Paramount and Citi jumped on filings showing Warren Buffett’s Berkshire Hathaway had built stakes in the companies.

Markets shrugged off comments from Jay Powell: “What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that … If that involves moving past broadly understood levels of neutral, we won’t hesitate to do that… We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down… There won’t be any hesitation about that”.

BofA May Fund Manager Survey: “extremely bearish…highest cash levels since 9/11, biggest tech short since Aug ’06, biggest equity unwind since May ’20…missing “full capitulation” piece = investors expect rate hikes not cuts; stocks prone to imminent bear rally but ultimate lows not yet reached“. This very much chimes with my view that while the market is in a structural bear market, it will be prone to short, sharp rallies, particularly after capitulation-like fakes.

GS: “The stagflationary macro momentum means multi-asset portfolios are likely to remain volatile, with both equities and bonds vulnerable – we remain OW cash”.

US retail sales were about as expected but accounting for inflation they are not so good, though still above the pre-pandemic trend as consumers continue to deploy a vast amount of excess savings in the face of rising prices.

Musk now also selling out of SpaceX? There’s an employee tender offer for the company, unclear whether Musk is offloading as part of this. Could it just be he wants to sell out of his overvalued companies before they are worth nothing? The old smokescreen argument for this so-called twitter deal…again I don’t know. This is Musk and he does Musk stuff. But what’s increasingly obvious from the market reaction is that investors don’t think this deal will be seen through. The risk-reward has not changed in favour of the shorts – Hindenburg has covered its short. Now the r/r might favour backing Musk to see it through and the board to enforce $54.20….maybe…they do have a trump card in being able to ban Musk from Twitter, but it’s not clear whether they have the stomach for this.

And I would not be prepared to back Musk since he is clearly phony. Others are using stronger terms. What’s obvious is that there has been no change to Twitter since the deal was agreed and Musk is finding reasons to back out. Or making it look like he is in order to get a lower price.

Meanwhile filings show Musk was talking to Twitter’s board about a possible board seat and purchase before he’d even declared his material stake in the company. So his filing claimed a passive investment when he had already been discussing a take-private with the company. The SEC has so far been toothless when it comes to Musk but might be minded to be more assertive this time.

BNP Paribas is out with its EV World Cup and, shock, it’s bad news for Tesla: “Shock defeats happen in sport, and last year’s winner Tesla (-) fails to win in any of its key battles, leaving VW (=) to win the World Cup for the incumbent team. Lucid (+) aside, experience triumphs over youth across our analysis, with GM (+) and Mercedes (+) also impressing. But as more OEMs dream of EV glory, there may be too many players on the pitch. With bottlenecks looming, we see a fierce battery battle ahead and make our first ever material (-10%) cut to our EV forecasts. Supporters then should pick their team carefully – growth stories in particular may fail to live up to the hype.”

Elsewhere, oil is back to the top of the two-month range after the breakout failed to gather much momentum. API reported a draw of 2.445 million barrels, versus the expected 1.533mn build. It comes even as the Department of Energy released 5mn barrels from the Strategic Petroleum Reserves.