Bassanese Bites: CPI Shock! – November 15 2021

Global markets

Global equities buckled last week following a higher than expected U.S. consumer inflation report, which also pushed up bond yields and the $US. The U.S. market is now convinced (according to futures pricing) that the Fed will have to raise rates by August next year – or almost immediately after it concludes the tapering in bond purchases by mid-2022. All that said, it’s fair to say equities so far at least remain fairly resilient to the unrelenting run of hot inflation numbers and market pricing of central bank tightening within a year. Indeed, after the initial post-CPI market slump, equities rallied over the rest of the week.

This resilience likely reflects several factors: corporate earnings remains strong, U.S. 10-year bond yields are still fairly contained at under 2%, and the Fed and many market economists (such as myself) still expect inflation to moderate next year, which may see current tightening expectations unwind. Indeed, next year could well be a ‘Goldilocks’ period, with still good growth yet moderating inflation – the key is how quickly labour markets tighten and wage pressures take off, allowing for the likely return to the labour market of many still sidelined workers.

A key global highlight this week will be October U.S. retail sales on Wednesday. After a strong 0.7% gain in September, the market anticipates an equally strong 0.7% gain in October – which in turn could heighten fears about an overly hot economy. Indeed, for equity markets, a strong retail sales result could be a case of “good news is bad news” to the extent it lifts bond yields and places downward pressure on still elevated equity valuations.

The other highlight will be China’s monthly ‘dump’ of data today covering fixed-asset investment, retail sales and industrial production. The big question facing investors is whether China’s notable slowdown this year has continued, or whether it’s showing signs of levelling out. Weaker than expected numbers would only heighten concerns about China’s economic outlook and place further downward pressure on iron-ore prices and the Australian dollar.

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