Is inflation still bubbling under the surface?
Markets started the week on the back foot but rallied into the end of the week after what many called a ‘soft’ CPI print. Year on year inflation came in at 8.5%, below the 9.1% from the month before and slightly below the 8.7% that had been expected. These are still high year on year numbers, and arguably this one-year average and the headlines that it provokes affects consumer perceptions. One suspects though that the market is probably more swayed by the incremental difference of the last month than the impact of the month that dropped off the number from a year ago. Looked at through that lens it was perhaps again a little surprising that the market reacted so positively to the dominant effect of falling oil prices feeding into petrol prices (that had been well-telegraphed) and was less worried about food prices that seem to be still on the rise. We discuss some of the more granular data below but it seems that any sign that we have turned the corner is some grounds for optimism, but perhaps it was the performance of the sectors within equity markets that perhaps gave the biggest clue as to what is going on. Banks, energy companies and materials companies here and abroad led the way and accounted for much of the gains, corroborated by commodity markets which rebounded across the board from energy to metals to agricultural products. Lastly, and probably not unrelated, the University of Michigan Consumer Sentiment survey indicated that all important US Consumer seem to share a slightly rosier view of the world’s economic prospects. This all adds up to a sense that the odds of the much vaunted soft-landing, until recently rated a slim chance, have increased. There is perhaps one caveat to all of this - the torrent of US centric data remains extremely noisy, and the US market remains quite volatile on a day to day and intra-day basis while other markets have been remarkably calm.
UK and European markets were especially dull despite news of increasingly severe economic headwinds. Chinese stocks were also flat overall despite even weaker than expected growth numbers and growing issues in the property sector which some commentators are likening to a massive Ponzi scheme, due to the sheer number of unbuilt but paid for apartments. Many property developers are now unable to complete these buildings while consumers are forced continue to service the debt they incurred, leading to so-called ‘mortgage strikes’. Meanwhile other Asian, Eastern European and South American markets made strong gains.
While the local market followed the global lead, and it was also the banks (with the exception of CBA), energy companies and materials companies that led the way, the mood was overall less buoyant due mainly to a fairly lacklustre start to the earnings season and, in contrast to the US, weakening consumer sentiment.
Government bond yields across the Western world edged up on the inflation news but not precipitously so and credit spreads tightened again across the credit quality spectrum, completing a picture of relative economic optimism.
Next week we’ll see some more inflation data from Japan, the EU and Canada but one suspects that housing data in the US may garner even more attention (again bad news could be good news for interest rate sensitive markets) as well as earnings from important retail bellwethers Walmart and Target.