Inflation Highs and HSBC's Dire Warning—Here's Why

TL;DR

CPI inflation in the US hits a 40-year high at 7%, but market reaction is relatively muted. China's fiscal and monetary policies show signs of easing, while supply chain disruptions are gradually improving.

Transcript

hey hey everybody welcome to the real vision daily briefing it's wednesday january 12 2022. this is alf the other of the macro compass and i'm here with the one and only darius dale founder and ceo of 42macro hey mate how are you doing good man it's good to have the dream team back man how you doing the dream team did you actually uh trademark that... Read More

Key Insights

• ✋ CPI inflation in the US at 7% YoY is the highest in 40 years, impacting real wages and potentially signaling a shift towards a deflationary regime.
• 😶 The market reaction to the inflation print is relatively muted, with bond yields unchanged and a rebound in tech stocks.
• 😄 China is implementing macro prudential policies to ease credit availability, but the disinflationary effects are still present.
• ⛓️ Supply chain disruptions are gradually improving, but risks remain, particularly due to China's zero COVID policy and the Winter Olympics.
• 🥺 Quantitative tightening and transitory inflation pressures may lead to a reversal in the bond market and increased risk premiums in riskier assets.
• 🍉 The uncertainty around long-term growth is low, while short-term growth expectations are high, making any potential growth slowdown a significant risk for the market.
• 🙊 Investors may need to pivot their strategies as the reflation trade reaches its peak and deflationary pressures intensify.

Questions & Answers

Q: Why was the market reaction to the high CPI inflation in the US relatively muted?

The CPI inflation results did not surprise investors significantly, dampening the impact on bond yields. Moreover, the focus shifted towards tech stocks, which rebounded, and the expectations of the tightening labor market influencing Fed's decisions.

Q: How do quantitative tightening and transitory inflation pressures impact the market outlook?

These factors indicate a shift towards a deflationary regime. As monetary policy tightens and nominal growth decelerates, the bond market could see a reversal, while riskier assets may face increased risk premiums.

Q: What changes in fiscal and monetary policies are being observed in China?

China is easing macro prudential policies, particularly in the real estate sector, to support economic growth. While these changes are gradually flowing through the system, credit growth remains relatively low.

Q: Are supply chain disruptions in China improving?

Yes, supply chain disruptions in China are starting to ease. High-frequency data, such as the ISM manufacturing and services surveys, indicate a downward trend in slower supplier delivery times. However, there are still lingering concerns, especially due to the zero COVID policy and the upcoming Winter Olympics.

Summary & Key Takeaways

• US CPI inflation reaches 7% YoY, the highest in 40 years, causing real wages to drop. Market reaction is unimpressive, with yields mostly unchanged and tech stocks rebounding.

• Quantitative tightening and transitory inflation pressures indicate a shift towards a deflationary regime. As the impulse of monetary policy tightening accelerates, nominal growth is expected to decelerate.

• China is implementing macro prudential policies to ease credit availability in the real estate sector, but the disinflationary effects are still flowing through the system. Supply chain disruptions are improving, but China's zero COVID policy may be at risk.