Hive Intelligence Report: US Growth and Inflation, EM Equities, and Japan Elections

Every week, we bring together our community of macro experts to discuss the latest market developments. In this piece, we distil all the latest insights from our conversations up to 15 September.

Inflation and Growth

US

• Real wage growth is still negative and there are no signs of a wage price spiral. For the third consecutive month, wages for the low-skilled have risen faster than for the high-skilled, and the gap in growth rates is now the most on record.
• Profits in national accounts and in SPX are at their highest levels relative to GDP/sales, yet high wage sectors are underperforming. The outperformance of low wage sectors reflects the attempt to reopen retail, leisure, and hospitality. As a result, the next NFP is likely to show slower wage growth.
• Over the past year just 1.62pp of the 5.25% inflation rate was from reopening components. Furthermore, re-opening CPI components fell 0.22% MoM during August, but non-reopening CPI components rose 0.35%. Read our view on the August CPI.
• The Fed, since June, are data-focused instead of reaction-function focused. In the next three to four months the market will take growth forecasts as a ceiling with expected downside shocks.
• Any dovish pivot at next week’s FOMC meeting is unlikely, even though the market is pricing in slowing growth and inflation.

Global

• Global food prices were up 33% in August from a year earlier. It not likely to get better as extreme weather, soaring freight and fertiliser costs, shipping bottlenecks and labour shorts compound the problem.
• Strong base effects will push inflation lower next year, whilst we are also unlikely to get the same percentage gains in commodities as we did over the past year.

Equities

US Equities

• Declining support from monetary policy, fiscal policy, Chinese growth, and domestic growth suggest US equities will eventually adjust lower.
• There’s cheap single name volatility across the markets with steep skew which make it surprising to not see more calls to exit winning positions. The base case of being bearish into September expiry is a dip to exploit, not to sell in to.

Emerging Markets

China: Economic Data

• Poor economic data reflects COVID restrictions, flooding and earlier policy withdrawal. Policy support is likely to step up soon – investment project approvals have restarted after six months.
• Stepped up credit extension should see the credit impulse start to turn around. Another RRR cut and more targeted liquidity support are also likely.
• Given the ongoing stress at Evergrande, we expect financial stability concerns to mean CNH stability.

India: Equity Market Outperformance

• Equity markets have significantly outperformed in recent months, supported by turbulence in China and recent Indian IPOs.
• A below-consensus reading on CPI should allow the RBI to remain firmly pro-growth with rate hikes still some way off. Reducing the very high liquidity surplus will come ahead of rate hikes.
• MS estimates that India’s inclusion in the JPM GBI-EM Global Diversified index would mean a 9.2% allocation for IGBs, the second largest share. It could take around 10 months for India to be phased in with monthly inflows around $3bn.

Philippines: Central Bank

• August inflation spiked above target at 4.9% YoY. Consensus is for BSP to leave rates on hold at next week’s policy meeting but there’s risk they may hike. But PHP is 1% stronger this week.

Australia and New Zealand

• AUD and NZD had both held up on reasonably strong data. Given the constraints from zero COVID policies and slower growth in China this decent economic momentum may not last. Australia’s weak employment data today has led to bearishness in AUD.

Japan Elections

• Kono likely to be voted in with Former Japanese Defence Minister Shigeru Ishiba planning to back him. With bank analysts slow to adjust their narrative it has brought legs to the long Nikkei trade.
• However, some people think that Abe and Aso will push against consensus and stand a chance of being elected.

Commodities

Uranium

• The squeeze in Uranium likely triggered by Sprott. The market is in structural deficit, miners are short capex, and Sprott is buying at a rate that is double the total Uranium volume traded in a year. Since there are no Uranium futures it appears the market is buying CCJ as a hedge.

Oil

• Markets shrugged off concerns in Chinese inflation given PPI remains near earlier highs, whilst US inventories continue to drawdown.

Copper

• China’s stock inventory is at its lowest for a very long time.

COVID-19

• Sweden may have reached herd immunity. Sweden’s COVID-19 policies have been set by chief epidemiologist Nils Anders Tegnell, not politicians, and during the Delta wave the country has registered barely any increase in cases or deaths. The real test comes this autumn and winter.
• Singapore could become a leader in future COVID communication. They have changed their strategy to ‘living with COVID-19’ and no longer report the active number of cases. Instead, they refer to critical illnesses and hospital capacity.

Trade Ideas

Short AUD

• RBA’s Lowe sounded upbeat but very dovish in his 14 September speech pushing back hard on market pricing for RBA rate hikes saying again that conditions are unlikely to be met until 2024. Short AUD is a preferred expression of Lowe’s very dovish speech.

Short USDJPY

• Lower US yields means we could drift back to 107.48, but with risk of a deeper correction if US equities pullback. Second, the market is still very short JPY after adding long USDJPY positions on the resignation of Suga, leaving a risk of an unwind. However, hedges appear cheap with 1 month Vol below 5.

US Rates Flattener

• 110/120bps in the 10y seems too low and should gravitative back to 150/160bps but should be led by the 5y and 2y. As a result, we look for a 5s30s flattener to 90/95bps.

Base Metals vs Precious Metals

• Bullish base metals vs precious metals on the underlying global growth story.

Bullish Indonesia FX

• Record high exports in August left a bumper trade surplus of $4.7bn (trend around $0.9/1bn). BI meets on 21 September and rates likely to remain on hold given inflation at 1.6%.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)