Inflation nerves alive and well

Inflation nerves are alive and well with robust US Retail Sales lifting US yields on Friday and underpinning the US dollar. Over the weekend, Bank of England Governor Bailey warned the bank would “have to act” to curb inflationary pressures. Mr Bailey sees plenty of transitory inflation, but his all-seeing monetary policy eye is also spotting underlying medium-term pressures as well. Lastly, New Zealand inflation, released this morning, rocketed to 4.90% YoY for Q3, well above the RBNZ 1-3% target. The New Zealand data was made all the worse by the fact that its largest population centre, Auckland, has been under Covid-19 restrictions for a good part of that time.

BoE, RBNZ, expected to raise rates

Markets are locking and loading a hike before year-end from the Band of England, while talk has shifted to a potential 0.50% hike from the Reserve Bank of New Zealand in November. Both sterling and the New Zealand dollar have outperformed in the last week on rate hike expectations. The only thing capping the kiwi at the moment is that the spiralling Covid-19 cases in Auckland may prompt the government to announce a level 4 “circuit-breaker” lockdown later today.

Meanwhile, Singapore’s Non-Oil exports YoY in September, rising by 12.30%. The MAS pre-emptively tightened policy slightly at its 6-monthly policy review last week. Assuming Singapore holds its nerve and continues to reopen, the NODEX should maintain its upward trajectory and hit high-speed if the Singapore-Malaysia border loosens to allow greater labour movement.

Asian markets will be predominantly focused on China data today. China releases Q3 GDP YoY (5.2% exp), Fixed Asset Investment YoY September (4.5% exp), Retail Sales YoY Sep (3.3% exp), Industrial Production YoY Sep (4.5% exp), and Unemployment. Of those, GDP, Retail Sales, and Industrial Production will carry the most weight. There is downside risk in all three thanks to holidays, weather, the energy crunch, the government crackdowns along with rising material costs and supply chain disruption. The National Bureau of Statistics press conference afterwards will be worth following for signals on the path forward for China’s economy for the rest of the year and into 2022.

China markets are likely to find some solace initially from weekend comments from the PBOC, dampening down nerves that Evergrande and its fellow property developers pose a systematic risk to the financial system. But the data dump will provide a binary outcome for regional markets today. Weak data equals equities down, strong data equals equities higher. A weak data print though will lift expectations of an imminent PBOC RRR rate cut which should be supportive of domestic markets once the post-release noise dies down.

A divergence in monetary policy between Asia (still soft) and much of the rest of the developed world (tentative tightening), will provide challenges for the region as Q4 progresses. The Fed taper is the elephant in the room, and if the PBOC remains accommodative and allows the yuan to modestly weaken, currencies around the region will once again face selling pressure. The indirect tightening of monetary policy that causes could cause angst amongst the region’s central banks and likely sees intervention measures stepped up. Some of that pressure may be relieved by the slew of reopening announcements by ASEAN countries last week, particularly in the tourism space. ASEAN is probably the only part of the world pining for a cold northern hemisphere winter to flush those winter sun tourists out of hiding.

Cryptos have had a busy few days after rumours flew on Friday that the US SEC might approve two bitcoin futures ETFs this week. Why you would want to buy a bitcoin futures ETF instead of bitcoin itself escapes me. But if you are an investor that is mandated to only have exposure to regulated markets, then this could be your chance to get involved, despite getting long at near-record highs. The increased drone of the “crypto is becoming mainstream” buzz in my ears is more irritating than tinnitus. Still, as long as vast swathes of the investment community are looking to get rich quick by believing it has any real value, I will respect the tradeable versus investible price action. Bitcoin jumped 7.50% on Friday to USD 61,650.00, held those gains over the weekend and has risen again by 1.50% to USD 62,500.00 this morning. I believe Jack Dorsey might have said something. Anyway, the all-time high of around USD 65,000.00 is in sight, and a daily close above that level tilts the technical picture to further gains targeting USD 80,000.00 going forward. And you all thought I was a crypto-cynic?

Putting down my copy of the now very well read Emperor’s New Clothes with a “will they never learn” shake of the head, we circle back to this week’s data calendar. Asia isn’t very exciting after today’s China data dump. Indonesia will leave rates unchanged tomorrow, while Japan’s trade balance may have some marginal interest. Its stock markets are hitched to Wall Street and the impending 594757635385^th extra budget since 1995, and the yen is trading purely on the US/Japan rate differential. Wednesday sees China announce its latest one and five-year Loan Prime Rate decisions. Unless today’s data is an absolute shocker, they will remain unchanged at 3.85% and 4.65%.

In Europe and the US, the pickings are relatively slim as well. US Industrial Production tonight and the Fed Beige Book on Wednesday will be of marginal interest. While Thursday’s Initial Jobless Claims could weigh on equities if it gives back last week’s positive gains. UK CPI on Wednesday will increase the rate hike noise to deafening levels and lift sterling if the YoY prints over 3.50%. Friday brings Markit Manufacturing, Services and Composite PMI releases from the European heavyweights, and the US. The UK releases Retail Sales and Manufacturing PMIs. Arguably they could have the largest impact on the week data-wise if only because they may give greater credence to the inflationary pressures, or, if the data is soft, temporarily alleviate tightening concerns.

US quarterly earnings swing from the large banks last week, to a broader mix of technology, FMCG and manufacturing companies. Goldman Sachs reported strong earnings on Friday to left US markets. With the masters of the universe filling their coffers for another quarter, the picture across the real economy may look rather more mixed, especially if you are exposed to rising, interest rates, material costs or supply chain disruptions. Their 2022 outlooks will be of more importance than their actual results and this week could see heightened two-way volatility in stocks.

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