May Global Macro Monthly - The limitation of vaccinations

Key points

• Economies continue to be governed by the virus. The US grew in the first quarter after a swift easing in restrictions, China slowed and Europe and Japan both saw contractions.
• Inflation has picked up in many areas, reflecting base effects, commodity prices and bottlenecks. The pick-up should prove temporary. We expect inflation to return below target in most developed economies. US inflation is likely more persistent. Some emerging markets may also see pressure.
• Developed market central banks will look through the temporary inflation spike but will monitor inflation expectation developments closely.
• Despite widespread expectations for an inflation easing, against potent fiscal and monetary stimulus, bonds are susceptible to a sudden adjustment in Fed expectations.
• Rising real rates should also support USD vs low-yielder crosses.