Maybe this time it’s different?
Last week, we heard from Fed officials that it was too early to “pivot”, these comments fell on deaf ears as equities rallied, and this week’s inflation print of 8.5% continued to buoy markets. Investors are assessing whether a slowdown in inflation would prompt the Federal Reserve to reduce the pace of rate hikes and increase the likelihood of achieving a soft landing while bringing prices down.
Headline inflation in the US abated slightly, down to 8.5% as compared to 9.1% in June, coming in below consensus and signalling that we may have reached peak inflation in June.
Looking under the hood, some of the components (energy, used cars, rental cars) that led to those eye watering figures are showing promising signs of abating. Most strikingly, rental car inflation, which once reached more than 100%, is now negative.
The S&P 500 ended up higher for the 4th week in a row. The “sell in May and go away” adage certainly did not hold up this time.
As we exit the summer months and head into the September FOMC meeting and US midterm elections in November, more market volatility could be expected as investors wait for clarity on where inflation and growth is headed.
It’s not too bad after all
Besides investors, consumers are feeling more optimistic too! US consumer sentiment rose to a three month high. A significant contributor to this could be the average price of gasoline has fallen over the last few weeks, and down to $4 a gallon for the first time since Russia invaded Ukraine.
Consumer sentiment is an important statistic to watch as roughly ⅔ of the US economy is driven by consumption.
Cars > Apartments
Official macroeconomic data from China released Friday and Monday shocked the market. July new loans were only 679B yuan after a rocketed 2.8T yuan June figure. July’s Industrial Production, Retail Sales and Fixed Asset Investment all fell below expectation.
Automobile sales were boosted in July, as policies encouraged consumption through subsidies and tax cuts. In fact, GM and BYD sold more EVs than Tesla in China. Data from the National Passenger Car Information Exchange Association showed that passenger vehicle sales increased 41% year on year, as of July 2022.
Property sales, on the other hand, continued to slump, falling to 2015 levels, according to Gavekal. Property developers cut back further on real estate investment in July as home sales worsened despite the lifting of COVID lockdowns and a slew of stimulus measures. National Bureau of Statistics (NBS) on Monday released July total investment in the property industry, fell 6.4 percent yoy in the first seven months of 2022 — the biggest drop since March 2020.
Reuters reported that Market rumours that the government have instructed state-owned China Bond Insurance Co. Ltd. to provide guarantees for onshore bond issuance for three private property developers, CIFI Holdings (0884.HK) and Country Garden (2007.hk) and Longfor Group (0960.HK). This hopes to reactivate the already dead refinancing market for the Chinese property developers.
There are difficult issues to resolve on both the demand and supply side and there is no “silver bullet” solution. PBoC has eased policy, but so far it looks like it is not quite enough to slow the decline. Aggregate financing has slowed sharply, but the growth of M2, money supply, has continued – meaning that banks are flush with cash but are not making enough loans to consumers and businesses.
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