
Equities | FX | Monetary Policy & Inflation
Equities | FX | Monetary Policy & Inflation
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We are bullish USD/JPY and see the pair hitting 150 in coming weeks. On the JPY side, we see two bearish factors. First is that since 1980, Q1 seasonals for the yen have been poor (Chart 1). Second is that Japan’s cycle is turning down: its inflation pulse is falling, and growth surprises are off their highs (Chart 2).
China faces a supply-demand imbalance that is preventing inflation from returning to positive territory. Demand-side measures like easing rules on the property sector have failed to lift consumer demand, while the supply-side push for the ‘three new industries’ (EVs, batteries and renewables) and infrastructure investment has been more effective. This has left PPI at -3% YoY, the lowest level since 2016 (Chart 3). That is just one reason we are short CNH vs a basket.
UK headline inflation rose to +4.0% YoY in December, 0.2ppt above consensus. Much of the rise came from core – the YoY rose to 5.1%, 0.2ppt above consensus and in line with Henry’s estimate, something he warned of since the last release. Our analyst-based forecast also flagged upside risks. However, we do not see it as overly hawkish. Importantly, inflation is still undershooting BoE November MPR forecasts (Chart 4). Henry sees value fading any knee-jerk hawkish reaction.
That equities are already trading at historically high P/E valuations could hurt 2024 returns (Chart 5). Investors are pricing in a veritable Goldilocks outlook of robust earnings and rate cuts. If they face disappointment on either of these fronts, valuations will likely downshift. The super-charged rally in the Russell 2000 (or ETF IWM) has probably run its course for now, but we still like it as a medium-term hold.
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