Although China has returned from its week-long break today, there are little signs that mainland markets want to play catch-up with the equity action seen elsewhere over the past week. Indeed, after spiking higher on the open, both the Shanghai Composite and the CSI 300, having risen 2.0% in early trading, are now nearly 1.0% lower, dragged down by the index’s Shenzhen components, which is enduring a torrid day.
Inflation nerves seem to be lingering around financial markets despite the FOMC minutes overnight, reassuring hinting at lower for longer, with no change in tack in sight. That may have arrested the rise in US longer-term yields, which traded sideways overnight, but wasn’t enough to push them materially lower. Any good work from the FOMC minutes was offset by higher US PPI numbers and US Retail Sales, which blew expectations out of the water by rising 5.30% in January.
The US Retail Sales was undoubtedly powered by the stimulus cheques hitting American’s bank accounts in December. Interestingly, Pantheon Macroeconomics estimates that only USD29 billion of the USD166 billion disbursed made its way into the Retail Sales number. American households remain cash-rich with Pantheon estimating that 60% of the cheques have been saved or used to pay down debt. That suggests that Americans have plenty of fuel in the tank to shop still.
There was noise overnight that the Retail Sales data would partially nullify the reasoning behind the USD1.9 trillion Biden-stimulus package, making it likely that the headline number would be cut. I would argue precisely the opposite. The December cheques were meant to reduce the pandemic burden and stimulate domestic demand. Therefore, they achieved exactly what they set out to do, boosting domestic consumption and economic activity.
What cannot be denied is that the whole exercise will be inflationary, with aggregate demand certain to ramp higher once the economy reopens further in March and April. However, there are 10 million fewer jobs than before the pandemic, so any inflation is likely to be cost-push and not wage/price spiral, thus transitory in inflation measures. Europe is an even grimmer picture, with much of the bloc still in lockdown and miles behind schedule in its vaccination race and facing a double-dip recession.
Government bond yields are grinding higher globally at the moment, but given the nature of the inflation pressures, are unlikely to derail the global recovery buy everything rally. The world is still awash in capital looking for a home, and the world’s central banks have not wavered in their intent to keep flooding the world with free money. What should happen, is the long overdue, and very welcome arrival of two-way pricing risk in global financial markets, notably the equity and crypto space. These days, markets contain more jump-suited bull market heroes than an Avenger’s movie, it’s about time they learned the challenges of using the bathroom in them.
US dollar rallies
Notably, the US dollar continued rallying overnight. The US dollar short squeeze may have more legs to it, which I had admittedly thought had run its course. One unintended consequence could be seen in Indonesia today. Markets, including myself, had pencilled in a rate cut by Bank Indonesia this afternoon. With USD/IDR climbing back above 14,000.00, those hopes are receding, and I expect BI to stand fast, even as the domestic economy remains under tremendous pressure.
Energy prices remain elevated, as vast swaths of US refining and extraction capacity remain shuttered due to the Texas big freeze. The global recovery trade is well and truly alive in the commodity space. Platinum is 1.60% higher today, Copper futures have rallied by 1.85% and iron ore futures are 0.80% higher. The movements in commodity and energy prices this year so far tell us the cost-push inflation is the new normal going forward.
As long as the world’s central banks keep the monetary spigots open, the buy everything trade should stay on track this year, even if it becomes more subject to the nearly forgotten concept of two-way price action. The taper-tantrum, when it comes sometime in 2022, will be a sight to behold.
