Over the last week, markets faced a tug of war between optimism over the earnings growth recovery and uncertainty over inflation risks.
The September inflation report for the US showed that consumer prices continue to edge higher. Headline CPI inflation increased by a higher-than-expected 0.412% month-on-month (MoM), bringing the year-on-year (YoY) inflation in September to 5.4% compared to 5.3% in August.
Core inflation, an important measure of underlying price pressures that excludes food and energy, was 0.243% MoM, resulting in YoY core inflation of 4.0%, similar to that in the previous month.
US consumers were paying more for most things relative to August, with the exception of travel-related categories (airline fares and hotel accommodations), which likely was due to the lingering impact of the Delta variant.
The ongoing supply chain delays, congestion and manpower shortages plaguing the transportation sector had resulted in uptick in prices across almost all categories of durable goods; the biggest contributors were new cars, appliances, furniture and bedding.
Despite a higher than anticipated CPI print, stagflationary risks appear relatively contained, in our view. While inflation could remain above the Fed’s long term 2% target for a while, we do not expect excessively aggressive inflation – similar to the 1980s – that could derail the broader economic recovery.
Broadly, we see inflationary forces being alleviated as supply-side bottlenecks begin to be resolved in 2022. That said, we are mindful that rising trends in rentals and housing prices could be more persistent in nature and we will monitor these carefully.
Housing or “shelter” which forms 32.5% of the CPI basket is an important datapoint to watch. Shelter inflation, which comprises home prices and rentals, have been rising steadily since the start of Covid-19 and contributing positively to the monthly increase in core inflation over the past year. Prices for shelter rose by 3.2% YoY and 0.4% MoM in September.
Catalyzed by a strong set of bank earnings reports, investor optimism over the earnings growth outlook won out over inflation fears. Strong third-quarter earnings data from the companies that opened the latest reporting season pushed the market higher despite declines in the early part of the week, and the US equity market closed out the week with one of the strongest weekly gains in recent months.
The S&P500 ended 1.8% higher for the week, while the Nasdaq and Dow Jones were up 2.2% and 1.6% respectively. The 10-year US Treasury yield, which started the week at 1.61% moderated through much of the week, touching an intra-day low of 1.51% on Thursday before rebounding back to 1.575% at Friday’s close.
We believe the overall risk-reward in US equities is favorable and we remain overweight in US equities in our asset allocation strategy. The Fed is on track to formally announce its taper program this quarter, which will reaffirm the overall growth trajectory and alleviate inflationary forces.
In China, our asset allocation strategy remains neutral as attractive asset prices are mostly offset by a subdued economic picture.
The onshore equity market (CSI300) was unchanged for the week after Friday’s close. The H-shares index (HSCEI), on the other hand, rose by 2.17% largely on Friday’s moves alone, likely off the strong earnings data coming out of the US.
China’s September inflation numbers reported last week showed that consumer price inflation as measured by the CPI was subdued at 0.7% YoY, versus 0.8% in the previous month of August.
Food prices deflation (-5.2% YoY) offset the increase in non-food prices (2.0% YoY) that edged higher due to higher utilities and fuel prices. However, the crunch from higher energy and commodity prices showed up strongly in producer prices.
Producer price index (PPI) inflation surged to 10.7% YoY – the highest since data began in 1996 – versus 9.5% YoY in August. The increase in energy prices (coal, fuels and gas) and energy-intensive upstream products (materials and metals) were the biggest contributors, pushing producer goods PPI inflation to 14.2% YoY. In contrast, the increase in PPI for consumer goods was relatively muted at 0.4% YoY, indicative of lack of strong demand from consumers.
The weakness in underlying demand was evident in the latest credit data released by the PBOC last Wednesday. Total social financing (TSF) grew by 10% YoY for the month of September (versus 10.3% YoY in August), the slowest since 2006. The biggest contributors to the slowdown in credit growth came from consumer loans, especially in the medium and long-term household loans, i.e. mortgages, reflecting the still-tight credit environment in the property sector.
Growth in short-term household loans slowed as well. Corporate loans also grew at a slower pace, despite an uptick in the short-term loans and commercial paper segment. Government bond issuance did not increase significantly, suggesting that we are unlikely to see a pick-up in government spending in the upcoming data this week as well.
Despite a subdued outlook, we believe that the risk of a potential crisis in China is limited. Critically, short of an unlikely major policy misstep, it is clear to us that the Chinese policy makers can and will inject more liquidity if required.
During the press conference on this latest set of credit data held last Friday (15 October 2021), PBOC officials responded to market concerns on the impact of the recent turmoil in the property sector on the banking sector. PBOC officials noted that the spillovers to the wider financial sector were “controllable” and that it would urge property developers to fulfill their obligations on their offshore US-dollar denominated bonds.
We note that the PBOC’s remarks pointed towards loosening of credit conditions for the property sector ahead, both for property developers as well as for homebuyers. Officials stated that markets might have over-reacted to the recent developments in the property market although such over-reaction “is normal”.
According to the PBOC, banks had also mis-interpreted the PBOC’s policy of stable outstanding loans for property developers, causing lending to shrink even towards “reasonable” projects. Hence, the PBOC had met with banks in late-September to guide them on the financial prudential regulations while maintaining healthy development of the property market.
In the week ahead, a significant development in the US exchange-trade fund (ETF) space is the potential approval of the first Bitcoin futures ETF, which might again set off significant media and investor interest in the highly volatile asset class.
This is especially so as speculation on the potential ETF launches had sent Bitcoin up towards the USD60,000 levels again – near its all-time high of USD65,000 in mid-April.
Comments in recent months by Securities and Exchange Commission (SEC) head Gary Gensler indicating that he favoured funds backed by CME-traded Bitcoin futures have prompted many providers to file futures-backed listings.
According to an updated filing with the SEC last Friday, asset manager ProShares is likely to launch a Bitcoin futures ETF as soon as Monday US time (18 October), with other applications by Invesco, VanEck and Valkyrie approaching in 4Q as well.Disclaimer applicable to recommendation
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