This week saw the highest United States (US) Consumer Price Index (CPI) inflation print in 31 years. At 6.2%, inflationary pressure is spreading throughout the economy; putting increasing pressure on the Federal Reserve (Fed) to raise interest rates.
Key themes for this week include:
- Chinese property stocks rally on policy hopes
- The Organisation of Petroleum Exporting Countries (OPEC) cuts its demand forecast for the fourth quarter
- Markets moderate on inflation concerns
- The Johannesburg Stock Exchange (JSE) reacts positively to the Medium-Term Budget Policy Statement (MTBPS)
EVERGRANDE DODGES DEFAULT AGAIN
Chinese stocks and bonds rallied on signs that Beijing could soften its position on the battered property sector, while industry heavyweight, Evergrande, avoided default, once again, by making a series of last-minute bond payments. Chinese regulators are considering easing rules on debt to help struggling developers sell off assets, as the Peoples Bank of China is considering allowing buyers to take over assets without affecting their own debt ratios. Prices for many property bonds remain well below face value, indicating that investors are not hopeful of being repaid in full. Bonds from Evergrande were quoted at less than 30 cents on the dollar on Thursday.
In the US, Elon Musk, the world’s richest man, polled his followers on Twitter over the weekend, asking whether he should sell 10% of his Tesla stock, saying he would follow their vote. Around 58% of respondents supported a sale. Musk sold nearly $5 billion worth of his shares in the first three days of the week as he exercised stock options that he received as part of his compensation package from Tesla. Following the survey, Tesla shares plunged, falling roughly 5% to $1 162 at Monday’s closing and about 12% on Tuesday. The stock has recovered somewhat on Wednesday and was trading at $1 073 at time of writing.
DATA IN A NUTSHELL
US consumer inflation for October was 6.2% year-on-year; ahead of expectations of 5.9%. It was the highest CPI inflation print since 1990. Notwithstanding the usual suspects such as fuel and housing prices, higher inflation was attributed to a broad set of factors including meat, poultry and eggs which surged by 12% year-on-year. Excluding food and energy, US Core CPI inflation was 4.6% year-on-year.
China’s Total Social Financing (TSF) grew by 10% year-on-year, lagging expectations of around 11% growth. The TSF measures new debt issued to China’s private sector. Considering the impact of the Coronavirus Delta variant, Evergrande, and the energy crunch, a slower rate of debt issuance does not bode well for China’s economic growth prospects in 2022. China’s CPI and Producer Price Index (PPI) inflation came in at 1.5% and 13.5% year-on-year, respectively, ahead of market expectations. Prior to October, China’s CPI inflation was trending down from May 2021 at 1.3% to 0.7% in September. China’s consumer inflation rate is being kept in check currently by sharply falling pork prices.
Third quarter gross domestic product (GDP) growth in the United Kingdom (UK) advanced 1.3% year-on-year, driven by hospitality, arts, recreation, and healthcare. Hospitality grew by 30% year-on-year on the back of depressed demand during last year’s pandemic lockdowns. The market was looking for 1.5% GDP growth, however, and the slower than anticipated growth number backs last week’s decision by the Bank of England to delay the hike in short term interest rates.
Brazil was also faced with an inflation read above expectations, coming in at 10.8% in October. This has raised fears of a 2% hike in short term interest rates by the country’s central bank. Brazil’s interest rates have already been hiked by 5.75 percentage points since March. Inflation fears are compounded by expectations of higher government spending going into next year’s election.
INFLATION DOMINATES MARKETS
The S&P 500 index moderated this week after last week’s rally sent the index to a high of 4 684.85. The decline in the S&P500 reflects the market’s concerns around inflation-led rate hikes, an expectation which favoured the financial sector over consumer discretionary this week, the latter of which is less attractive in a rate-hiking regime. Disney’s earnings disappointed across the board, with 1.2 million new Disney Plus subscribers reported for the fourth quarter for a total of 118.1 million compared to Netflix’s 214 million subscribers.
European stocks had an uneventful week. The market, in effect, held on to last week’s 1.7% gains, which were driven by upbeat earnings. Luxury brand, Burberry, reported revenues exceeding pre-pandemic levels with significant support from US and China sales growth. In a recent speech, the Austrian Central Bank Chief and European Central Bank (ECB) Governing Council member, Robert Holzmann, signaled that the ECB’s bond purchases could dry up in late 2022 which is ahead of economist forecasts of its conclusion in 2023. Holzmann also added that he is against any new longer-term refinancing operations aimed at incentivising banks to lend to the real economy.
The local JCAP40 Index reacted positively to the MTBPS on Thursday, closing at 32 156 and raising the week’s gains to 1.95%. The JSE Resources Index bucked the trend to deliver a 6.2% improvement the week. The R17 billion bid for Royal Bafokeng Platinum by Northam Platinum came as a surprise to the market which had been anticipating a takeover by Impala Platinum.
Gold surges to five-month high on US inflation numbers
On the back of the biggest annual gain in US CPI in the last 31 years, and after months of frustration for those long on bullion, the yellow metal hit a five-month high, moving above $1 870 per fine ounce on Wednesday. Gold, which is seen as an inflation hedge by some, rose as much as 2%. This despite the strength in the US dollar as the US Dollar Index (DYX) hit a 15-month high. Aside from Wednesday’s surge upward, gold prices have been steadily rising over the past five days, their longest winning streak since the first week of July, when the market was in the black for seven days.
OPEC cut its world oil demand forecast for the last quarter of 2021, on Thursday, as soaring energy prices are likely to curb demand for the commodity in some of the world’s fastest growing economies. The organisation said global demand for oil would increase by 5.7 million barrels a day this year, down 160 000 barrels a day from last month’s expectations. The price of oil has risen to above $86 per barrel, a three-year high. Weaker demand for oil could ease pressure on the cartel, which has been criticised for its constrained output. US President, Joe Biden, has also been critical of the group for not doing more to help alleviate the global energy crunch.
CURRENCIES REACT TO US INFLATION
The DYX touched 95 after strengthening amid the higher inflation print on Wednesday before settling around 94.9 on Thursday. The greenback last traded at these levels in July 2020, highlighting the market’s reaction to inflation. The market is likely pricing-in further pressure on the Fed to raise interest rates sooner rather than later.
The British Pound depreciated to a low of $1.336/£ on Thursday, its lowest level since mid-December 2020. The Euro followed suit; losing 0.9% in value against the greenback this week to reach $1.146/€. Both currencies depreciated in response to the US inflation news which sent the US dollar higher, and in the UK, the lower-than-expected economic growth number likely added more pressure to the pound sterling.
The rand slipped to a low of R15.485/$ on Thursday in the wake of high US inflation news but managed to recoup some of the losses after the SA Minister of Finance, Enoch Godongwana, tabled his first MTBPS. The MTBPS predicted SA’s debt to GDP percentage will peak in 2025/26 at 78.1%.
The rand is trading at R15.30/S, R17.50/€ and R20.45/£.