George Lucas, Raiz Group CEO
Last week saw a pullback in the US equities market, led by a major sell-off in the US tech sector. The pullback wasn’t restricted to the US, with similar slides in other stock indices overseas and in European markets. However, the pull back in Europe has not be on the same scale as the US.
Also, this is the first time the European market has outperformed the US in common-currency terms since a period between mid-May and 8 June. In that period, Europe’s out-performance was largely due to a big rise in the euro against the US dollar. That has not been the case this time around.
US consumer prices rise on virus fears
US consumer prices lifted solidly in August, up 0.4 per cent month-on-month. The large increase in core CPI was principally due to a 5.4 per cent surge in used motor vehicle prices which, unusually for this very early stage of the recovery, reflects problems with dwindling inventory.
Indeed, the cost of used cars and trucks jumped by the most in more than 51 years, with Americans shunning public transportation because of COVID-19 fears probably also a factor behind the data.
Looking closer at US inflation, many commentators are happy as the US approaches its inflation target. However, I see it as something to be wary of as it’s not expected to see such large increases in inflation at this stage of the economic recovery.
That’s because with such a large amount of money being printed in the US, there is always the risk that it has gone too far and inflation rises substantially due to structural supply issues around goods and services caused by COVID-19 restrictions. Indeed, these structural supply chain issues already have caused the latest iPhone release to be delayed.
On the outlook for US monetary policy, investors will turn their attention this week to the Federal Open Market Committee’s (FOMC) September meeting, but are likely to disappointed as the Fed will probably unveil only limited changes to its policy statement and forecasts.
China: credit growth jumps in boost for recovery
In China, credit growth increased in August, lifting to its highest rate in two-and-a-half years as growth in direct financing and shadow credit picked up amid bank lending. The increase is due to a surge in government bond issuance and other easing policies that continues to take effect and that should boost China GDP growth in 3Q and 4Q.
On that point, expect continued ramp-up in lending in the coming months. A further acceleration in government bond issuance is scheduled for the rest of the year, while stronger investment demand due to ongoing economic recovery should prop up issuance of corporate bonds and equity.
Gradual recovery underway in UK
In the UK, the strong 6.6 per cent rise in GDP for July suggests that the record-breaking negative growth rate of GDP in Q2 will be followed by a record positive growth rate in Q3.
Keeping things in perspective, July is likely to be the last of the big monthly step-ups in UK economic activity as COVID-19 restrictions ease, with a full recovery unlikely to be achieved until early 2022.
Meanwhile, the continuation of Brexit talks in the UK and the possible vote on the government’s Internal Market Bill in Parliament could further weaken the pound this week.
Central bank policy looms in week ahead
In Indonesia, Bank Indonesia (BI) meets this week, but I don’t expect the central bank to change policy amid intensifying currency depreciation due to debt monetisation worries. I also can’t see BI raising interest rates as Jakarta goes back into lockdown
In Malaysia, in case you missed it, Bank Negara Malaysia (BNM) left its policy rate at 1.75 per cent last week, but with the nation’s economy weak I doubt this marks the end of the central bank’s easing cycle. But the pressure is off as the Malaysian Ringgit (MYR) has weakened substantially.
Finally, we have seen a bit of strength in the US dollar as “risk off” seems to be the theme of markets over the last two weeks. However, I expect this will not last long and the USD will soon be back under some renewed pressure in general.
Such an outcome could benefit riskier Malaysian Ringgit (MYR) and Indonesian Rupiah (IDR) currencies, but don’t hold your breath. US real yields are going to continue to fall and that is not good for MYR & IDR as the real yields fall in the US will benefit currencies more like AUD and Euro.
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