By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Much Ado …
– “In a false quarrel there is no true valour” – William Shakespeare, Much Ado About Nothing
Market reaction to US CPI undershoot appears to be a case of “much ado about nothing”, although it admittedly lacked the Shakespeare’s mirth and flair.
The sequential shortfall in consumer price pressures (+0.3% MoM vs +0.4% consensus) led by the core reading (+0.1% MoM vs. +0.3% consensus) was disproportionately attributable to the 9.1% plunge in airline fares and a 1.5% drop in used car prices.
Whereas underlying inflationary pressures from food, housing and other goods remained firm. What’s more, details of CPI data in no way suggest an imminent knock-back in wage inflation.
Upshot being, there is no reason for an over-reaction to US CPI undershoot.
On one hand, dis-inflation from Covid delta variant outbreak setting back airline fares and hotel room rates is likely to be temporary, with a restoration in price increase likely to follow. Yet on the other, elevated used car prices lifting inflation must also be discounted insofar that demand for durable goods such as cars are likely to abate; and most importantly the chip crunch lifting prices due to production disruptions should also fade (even if only belatedly).
The wider point is that the “surprise” elements of this US CPI is a “false quarrel” that neither the inflation hawks nor doves may seize to their advantage.
Fact is, here is nothing conclusive in the data that ought move the needle on the Fed’s Jackson Hole guidance.
Specifically, for all the fuss about US CPI miss, inflation data merely validate pre-existing views that taper, while being ruled out for Sep FOMC unveiling, remain viable for late-2021.
So, “there is no true valour” that doves can claim. On that note, your scribe is unable to shrug off the feeling of much ado about nothing (of substance) in the bond markets that resulted in the UST yield curve bear flattening (drop in yields led by the long end).
Albeit Modestly Averse …
That said, US CPI data could have been a convenient excuse to chase yields lower amid safe-haven demand amid Covid delta concerns (which did show up in inflation details).
Especially as this squares with equities sliding into the red and a stronger USD despite softer yields.
Wall St down 0.6-0.8% and Nasdaq sliding 0.5% despite softer yields smells like “risk off” rather than rotation.
Meanwhile, USD retracing knee-jerk dop in CPI; with a firmer JPY on safe haven demand (USD/JPY slip to mid-109) and Gold (up 1.2%); in contrast to EUR slipping back to 1.18 from post-CPI pick-up, appear to have all the hallmarks haven demand.
And softer commodity prices against this modest risk aversion (partly on demand recovery doubts) piled on RBA’s dovish pushback on rate hike timeline to knock AUD back to low-0.73.
Despite SGD backstop from a firmer CNY, USD/SGD dips to low-1.34 reversed. Sentiments may be poor, but what’s rich is the irony of CNY for SGD support despite looming China risks.
Bracing for China Headwinds
Admittedly, China’s activity data for August is expected to show a further slowdown, amid H2 headwinds to economic recovery.
Bracing for headwinds and a sharp slowdown in supply-side activity in industrial output coinciding with demand-side retail sales is arguably worrying.
But it is self-imposed policy risks, not cyclical economic undulations, that is the bugbear. Fact is, all else equal, Beijing has enough policy flexibility and tools to lean against the cyclical slowdown.
Whereas the decided regulatory crackdown alongside property tightening has not only increased policy opacity/uncertainty but threatens adverse contagion risks.
One of China’s biggest property developers, Evergrande on the brink of debt default not only poses systemic credit risks, but could spark a crisis of confidence.
In which case, “bracing” may be an understatement of market nerves. The exact opposite of “much ado about nothing”.
Credit: Mizuho Bank Ltd
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