September 20, 2021
September 20, 2021 | Adviser News
Weekly Market Update
Weekly Macro & Markets View
nvestor confidence suffers as China’s economic growth slows
China has moved into the limelight of global observers again. Investors are concerned about slower economic growth, the impact of continuous regulatory measures against major internet companies, and credit issues in the slowing property market. Economic activity data for August were weaker than consensus had expected. Retail sales, particularly in the services segments of domestic travel, dining, and entertainment, suffered from strict lockdown measures in various provinces affected by the spread of the Covid Delta variant. While this could be interpreted as a one-off slowdown, we are concerned that the latest wave of infections in the province of Fujian, an important industrial base on the Eastern coast, will continue to hamper trade and consumption. Though weaker than expected industrial production and manufacturing investment activity fared better, benefitting from strong exports in August. Meanwhile, property investments and home sales are suffering from the tightening in developers’ financing. Home prices are rising at a slower pace, with some major cities like Beijing and Guangzhou experiencing a rapid slowdown in house price inflation. Concerns about the ailing real estate developer and digital technology group Evergrande are reflected in the more than 90% drop of its stock price since its July 2020 high. On a positive note, we believe that the government will alleviate the pressure on the economy with targeted fiscal and monetary measures in Q4.
Credit: Evergrande jitters don’t spill into developed credit
Despite a broader risk-off mood last week driven by news flow around the Chinese property developer Evergrande, spreads tightened in the US and European credit markets. While investor angst centres around whether the saga at Evergrande represents a ‘Lehman moment’ for China and the world, the sanguineness of developed credit markets implies that systemic risks to global credit seem limited in probability and impact. The US high yield market was more jittery during late summer around concerns related to Huarong. Evergrande bonds trade at distressed values with prices trading in the range of 25% to 30%, implying a credit event is in the price. A restructuring appears more likely than liquidation with a coupon payment on 23rd September being closely watched by investors. That said, a systemic spillover into the property sector and exposed financial institutions, such as banks and insurance companies, should largely depend on the policy response. Longer term, it should be healthy if credit investors price in appropriate risk premiums for Chinese credit not contingent on government bailouts.
US: Stocks falter despite good economic releases and easing inflation
US stocks slipped for a second week, though the S&P 500 was only down 0.6%. While the index is still less than 3% off its all-time high at the start of the month, it is now testing the bottom end of its smooth uptrend. To keep the upward momentum intact it will be important that the ‘buy-on-dip’ investor mentality holds. Despite the move in stocks, it was a good week for US economic data, with industrial production back at pre-pandemic levels and regional manufacturing indicators strong. More importantly, retail sales rebounded in August. Online sales were particularly robust, jumping 5.3% MoM, while auto sales softened in part due to ongoing supply restrictions. Inflation data were the focus of the week, however, with some relief that both headline and core CPI readings moderated, coming in below expectations at 0.3% and 0.1% MoM, respectively. While a welcome relief from the recent surge, readings are still up 5.3% and 4.0% from the depressed levels of a year ago. We maintain that base effects and better supply/demand dynamics will increasingly help but acknowledge that elevated readings will remain into next year.
Eurozone: Final release confirms August inflation spike
Eurostat’s final release confirmed the flash estimate, with headline Eurozone inflation hitting a ten-year high of 3.0% in August from 2.2% in July, and core inflation jumping to 1.6% from 0.9%. Inflation statistics have been extremely volatile this year due to changes in the HICP weightings, the different timing of summer sales due to Covid, the lapsing of a temporary cut to German VAT, and higher oil prices. The base effect from higher oil prices should start to wane in the next few months. However, gas and electricity prices have now recently spiked and this will add another source of upward pressure on inflation. The upshot is that headline inflation is likely to rise even further over the next few months though we still expect the ECB to look through this and concentrate on evidence of second-round impacts on wage growth, which so far remain modest. However, higher gas and electricity prices could weigh on consumer spending in the region, especially if they spike further over the winter months.
UK: Inflation spikes and retail sales disappoint but the labour market improves
The UK saw a mixed set of data last week that will keep rate hikes in play in 2022. Similar to the Eurozone, inflation spiked in August due to a mix of factors. Headline CPI saw its highest jump on record to 3.2% in August from 2.0% in July. Core CPI inflation hit a ten-year high of 3.1% from 1.8% in July. A large part of the increase was due to base effects with discounts from restaurants and hotels last year due to Covid and the Eat Out to Help Out scheme. However, inflation could increase further in the coming months due to the recent spike in gas and electricity prices. Meanwhile, retail sales disappointed in August, falling a fourth consecutive month, down -0.9% MoM. This may partly reflect a return to more normal levels of household consumption, however, with service sector spending picking up as lockdown restrictions ease. Indeed, the labour market continues to improve with net jobs created up 183,000 in the three months to July. Overall, the data are still consistent with an ongoing recovery and the Bank of England hiking interest rates in 2022.
Australia: Employment drops amid lockdowns
The current round of lockdowns started to show some damage to the labour market in August. There were around 146k job losses, driven by both the full-time and part-time segments. New South Wales experienced a 4.2% MoM fall in employment. As during the first lockdowns in Q2 2020, the participation rate dropped considerably from 66% to 65.2%. Thus, the unemployment rate is artificially lower, down from 4.6% to 4.5%. The underemployment rate moved up from 8.3% to 9.3% in August, better reflecting the deteriorating state of the labour market. We suspect that data will continue to be weak in September given that lockdowns are largely still in place. However, a potential reopening in October would likely lift employment swiftly. In his recent speech, Governor Lowe appeared quite bullish regarding a recovery in Q4. The RBA also views fiscal stimulus as a more effective measure to respond to short-term Covid and lockdown shocks. Therefore, the RBA decided to go ahead with its QE tapering in September. However, the RBA also extended the timing of the next tapering talk until mid-2022.
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