THE market continues to question the notion of “transitory” price pressures.
But it’s remarkable how quickly equity markets have rebounded from recent shocks around inflation.
Stronger-than-anticipated US inflation data last week drove market volatility and a rare down-week for US equities. The S&P/ASX 300 lost 0.04% and the S&P 500 was off 0.27%.
There was also some movement in China. Beijing may be looking to ease pressure on the property sector, which prompted a rebound in the iron ore space.
The market remains focused on the risk of China over-tightening monetary, fiscal and regulatory policy settings, so signals that may mitigate this risk have been well received.
The Chinese Communist Party’s sixth plenum last week appears to have paved the way for indefinite leadership by Xi Jinping.
We are seeing a sharp rise in case numbers in Germany. But as in other similar waves, hospitalisations so far remain under control.
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Other European counties are also seeing an increase in cases. Denmark, Austria and the Netherlands are looking at reintroducing some mobility restrictions in response.
Otherwise there was little new to note last week.
However you want to slice and dice the inflation data, the key takeaway is that we are looking at 30-year highs.
US CPI grew 0.9% month-on-month — versus 0.6% consensus expectations — and is running at 6.2% year-on-year.
The core data (ex food and energy) rose 0.6% month-on-month versus 0.4% expected. It is running at 4.6% year-on-year.
A rebound in Covid-affected sectors such as auto and hotel prices helped lift both the headline and core readings, but the breadth of excess inflation pressures continued to increase.
Services inflation will be keenly watched as the US economy re-opens. So far it remains in its 10-year band, but has experienced strong recent momentum.
Core CPI will peak at 6.9% in March 2022 according to consensus expectation at this point. This leaves plenty of scope for the market to continue testing the Fed’s “transitory” line in coming months.
In Australia, employment declined 46.3k in October while the unemployment rate rose 60bp to 5.2%. This was weaker than expected, but the outcome largely reflected measurement issues related to recent lockdowns.
Elsewhere a strong rebound in company forward orders augers well for growth as we emerge from lockdowns.
The slowdown in credit may have bottomed in China. October is showing credit growth, potentially improving confidence for the rest of the year and into 2022.
After recent sharpening of concerns over property there are reports that the People’s Bank of China may introduce several measures to ease pressure on the sector. These include:
Elsewhere, approval of Xi’s doctrine on Chinese Communist Party history — the first in 40 years — at the sixth plenum seems to set the stage for Xi to retain power indefinitely.
Australian ten-year government bond yields largely held on their 30bp rally from the previous week.
The US equivalent yields rose 11bps to 1.56% on the inflation data, but remain well below recent highs.
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The inflation print saw the gold price gain 2.8%.
News of potentially looser policy in China prompted good gains among commodity stocks, though the prices of iron ore (-4.9%) and copper (+2.4%) remained more subdued.
It was a disappointing season for the banks in the sense that all missed consensus pre-provision profit expectations.
ANZ (ANZ) slightly missed due to costs and NAB missed by 2% given weak markets. Westpac (WBC) missed by 17% given a sharp hit to net interest margins (NIMs) and higher costs.
Key themes across the results included:
Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.
Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 12 years of its 16-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.
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