Where Are We Headed?
This weekly is on the early side and I am wary of what Friday brings, especially as the debt ceiling saga gives rise to further bond market volatility.
It has been a week of cautious risk-on again. Money Market funds drew a massive $41bn of inflows while global equity funds saw inflows of $545mn with communications, staples and financials being the main beneficiaries. Healthcare suffered. Global bond funds saw reduced inflows but Asian bond funds saw big inflows of $4.5bn on the back of foreign buying (India, Malaysia, South Korea & Thailand). FX markets saw the US$ index (a basket of six other currencies) trade down to a one-year low on the back of the March inflation print which was perceived as being close to expectations. Headline inflation rose 0.1% m/m to 5.0% y/y. Worryingly, Core inflation (ex. Food/Energy) however rose 0.4% m/m to 5.6% y/y and remains persistent. Energy fell -3.5% m/m while food was unchanged. Food at home fell -0.3% m/m (first drop since September 2020) to 8.4% y/y. Debate continues on the Fed’s next move – given Friday’s retail sales print (which was negative but better than expected), one more 0.25% rate hike looks likely. There are still several at the Fed who feel more hikes are needed to make progress on inflation.
What is clear is that more Central Banks are starting to pause on further rate hikes. Philippines, India, Singapore, Australia, Canada – have all paused or indicated they will do so. In China, inflation fell again by -0.30% m/m to 0.70% y/y (NBS) as consumer spending proves slow to get off the ground due to past covid lockdowns and a slow global demand picture. PPI inflation fell -2.5% y/y (Feb: -1.4% y/y) while Food inflation slowed by -1.4% m/m to 2.4% y/y (Feb: 2.6%); smaller banks are finding their margins being squeezed and have cut deposit rates to ease costs as loan growth faces pressures. Overall though, we have seen good Chinese economic data with credit rising to its highest and exports surging. There is a lag between the consumer and the economy which should close as the economy unwinds. About 70% of Chinese household wealth is tied up in property; estimates (by Cap. Economics) say this declined -4.3% in 2022 and leading to a consumption cut. Recent buyers with larger mortgages have suffered the most and have therefore cut back the most. Average home prices in the 35 smallest cities (out of 70 surveyed), known as Tier 3, saw a 13th consecutive month of y/y declines in Feb. For new homes, the average price for sales in Jan to Feb this year was Yuan10,558 per sqm, some -6% less vs Jan to Feb 2021. Household bank deposits rose to Yuan17.8tn in 2022 and a further Yuan9.9tn in Q1 this year. A latest Central Bank survey found a -3.8% drop in those saying they preferred to still save but remains high at 58%.