Global Inflation Weighs on G-7 as Higher Bond Yields Persist

74k4qmqj86rzit40y)7a9o5o_media_dl_1.png Bloomberg

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(Bloomberg) — Global finance chiefs are coming to terms with the new economic reality that a consumer-price shock they had hopes of skirting is looking likely to endure.

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As the second day of Group of Seven discussions proceed in Paris, the aftermath of a bond-market readjustment factoring in more inflation has raised the burden of proof needed to keep borrowing costs unchanged. The prospect of higher interest rates is looming, with associated stress to growth and budget deficits.

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The talks with finance ministers and central bankers on Tuesday will now continue against a backdrop of 30-year Treasury yields hovering close to the highest since 2007. With the Iran war that caused the energy shock still unresolved, officials will survey the uneven topography of global prosperity and touch on monetary policy too, before turning to discuss terror financing. 

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But darkening the mood over somewhat cerebral discussions about imbalances ranging from US budget deficits to weak Chinese demand is the more pressing reality that the Middle East crisis is bearing down on economies, impacting growth and feeding price pressures. 

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“The longer it goes, the higher the risk of secondary effects,” said OECD Secretary General Mathias Cormann. “If you see increases in wages as secondary effects, then central banks will need to take action — even if the economic growth outlook is somewhat weaker.”

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Pressure for a response is rising on central bankers from around the G-7 club, with investors increasingly betting on moves to raise borrowing costs as soon as June, most notably in the euro zone and Japan. 

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One notable absentee from the meeting is newly appointed Federal Reserve chief Kevin Warsh, who has just taken charge with the expectation from US President Donald Trump that he should try to cut borrowing costs. The lingering energy crunch is making that prospect ever harder to achieve.

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“Increasingly as this shock persists, they are getting further behind the curve,” Nuveen Global Investment Strategist Laura Cooper told Bloomberg Television. “The question is, when will the Fed potentially pivot to try to showcase that they’re going to really curtail those inflationary pressures?” 

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Data on Tuesday is underscoring some of the unfolding impacts across the G-7 club. In Japan, the economy grew much faster than expected at the start of the year, supporting the case for further Bank of Japan rate hikes.

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Later in the day, numbers may show Canadian inflation jumped to 3.1% in April, even though core gauges were steadier. 

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Just before the ministers met meanwhile, UK numbers highlighted how the Iran war shock is hitting growth there. Employers slashed jobs by the most since the start of the pandemic, suggesting the crisis is hurting demand for workers.