Asian equity markets are on the back foot today after China’s PPI release printed at a record high of 13.50% YoY for October, with officials blaming weather, material and energy costs. That overshadowed the Inflation data, released at the same time, which came in elevated, but on target at 1.50% YoY for October. The PPI should retreat into the end of the year, thanks to falling iron ore prices, now at one-year lows, and coal prices. Still, Asia is on inflation alert, fearing future costs of inputs from goods sourced from the mainland.
To be sure, some risks remain regarding China itself. Its Covid-zero policy means that if cases in the current outbreak spread, to say port cities, mass closures could result if its previous go-to strategy is anything to go by. That would have a knock-on disruption that would be felt across the globe. The state grid operator has already said electricity supply and demand are finely balanced into the winter months recently, and a colder than usual winter will definitely bring those stresses to the front of investor thinking again. Oil prices continued climbing last night, and despite their success in crushing the coal price rally, natural gas prices have remained robust.
Perhaps the main driver weighing on Asian sentiment today is China’s property sector. Evergrande faces a final deadline today for around USD 148.0 million in offshore coupon payments. It raised a similar amount by selling a stake in another business earlier this week, but whether that cash makes its way offshore is yet to be confirmed. It is not alone though, Fantasia stock returned from suspension today and promptly fell by 50% in Hong Kong. Kaisa faces offshore payments this week, as do other developers. The silence from the Chinese government on how it will manage this situation, exacerbated by the Communist Party Plenum in progress at the moment, continues to be deafening. Fears of defaults and disorderly collapses within the China property sector, and potential financial contagion, continue to stalk Asian investor sentiment.
US PPI within expectations
In the US overnight, PPI and Core PPI rose to 8.60% and 6.60% respectively YoY for October. Eyewatering, but right on market expectations. Combined with some hawkish Fed-speak, it was enough to prompt a modest correction lower in equity markets, after a long winning streak. Notably, the US dollar and US yields ticked lower as well, reinforcing to me, that sentiment and positioning in individual asset classes is what is driving price action in markets now. Given how wed US markets are to the post-taper lower-for-longer-rates story, US core and headline inflation data tonight would need to print well above 5.0% and 6.0% YoY respectively, to cause an inflation stampede for the door.
Elsewhere in Asia, Japan’s Reuters Tankan eased slightly to 13 on fears over rising energy and material costs, etc, while South Korean Unemployment edged slightly higher to 3.20%. That shouldn’t be enough to distract the Bank of Korea from hiking rates into the year-end. Australian Westpac Consumer Confidence climbed to 105.3 for November, reflecting an easing of restrictions in Victoria and New South Wales.
German and Norwegian inflation will show elevated readings but are unlikely to be market-moving. Markets seem to be showing herd immunity to uncomfortable inflation prints, and who can blame them? Central banks continue to fence sit and, in some cases, quantitatively ease into those inflationary environments. As long as they keep saying one thing, only to wimp out or pour petrol on the fire, markets will have little incentive other than to keep the disco inferno of asset price appreciation going. This week is noisy, but unless US Inflation tonight slaps the Federal Reserve with a dead fish hard enough to draw blood, I can’t see much reason for the music to not keep on playing.
