Investors React to Global Inflation and Slower Growth in China

October 18, 2021

The third week of October commenced with sharply higher long-term interest rates, a strengthening dollar, and a setback in equities. The rising price of West Texas Intermediate crude oil touched its highest level in the past 52 weeks and is currently showing a 1.6% advance from Friday’s closing level. Bitcoins cost over $60,000 and are close to their half-year high.

Ten-year sovereign debt yields have increased seven basis points in Italy, six basis points in the U.K., five basis points in the United States and Spain, four basis points in Germany, France and the Netherlands, and a basis point in Japan.

The dollar has appreciated 0.6% against the Mexican peso, 0.4% relative to the Australiand dollar, 0.1% vis-a-vis the Japanese yen, and 0.2% versus the Canadian and New Zealand dollars, the euro, the Turkish lira and the weighted DXY index. The price of gold softened 0.3%.

In equity trading overnight, European share prices show the biggest drops so far today, including losses of 0.9% in France and Italy and 0.6% in Germany and Spain. Equities fell 0.5% in Taiwan, 0.3% in South Korea, 0.2% in in Japan, and 0.1% in China. U.S. futures are down about 0.4%.

Economic news today is dominated by the release of Chinese data, including weaker-than-forecast GDP growth last quarter. An uptick of only 0.2% versus 2Q was the sixth quarterly advance in a row but the slowest of the sequence and only half as strong as in the second quarter. Year-on-year growth of 4.9% was down from 7.9% in 2Q and 18.3% in the first quarter, and the smallest annual expansion since the third quarter of 2020. Chinese officials put a positive spin on the results, citing the average 9.8% on-year growth achieved in the first three quarters of 2021 after full-year growth of 2.3% in 2020 as evidence that recovery is entrenched and continuing. Market hopes are diminishing that Chinese monetary policy might become more accommodative.

Other Chinese data reports today revealed

  • A weaker than expected, 18-month low 3.1% rise of industrial production in September. Output has been stymied by supply bottlenecks and scarce and more expensive energy.
  • Fixed asset investment during the first nine months of 2021 also recorded slower growth than anticipated. The rise of 7.3% was the was down from a year-on-year 23.0% increase in the first half of the year.
  • Capacity utilization slipped to 77.1% in 3Q from 78.4% in the second quarter. 77.1% was above and average of 74.5% in 2020 but only marginally more than the average of 76.6% in 2019.
  • Retail sales got a lift from diminishing covid cases in September. A rise between September 2020 and September 2021 of 4.4% was larger than 2.5% on-year in August and also beat analyst expectations. But 4.4% was not enough to prevent a further reduction in the year-to-date pace. Sales growth of 16.4% in January-September was down from 18.1% in January-August and 23.0% in the first half of 2020.
  • A 4.9% unemployment rate in September was below 5% for the first time in 33 months.

Consumer prices in New Zealand leaped 2.2% between the second and third quarters of 2021, a half percentage point more than forecast, which resulted in a 1.6 percentage point increase in the rate of on-year inflation to a 41-quarter high of 4.9%. That compares with 1.4% a year earlier.

Czech producer price inflation accelerated to a 342-month high of 9.9% in September. Back in January, Czech producer prices were unchanged from their year-earlier level.

The year-on-year rise of British house prices according to the Rightmove index rose to 6.5% in October from 5.8% in September and 5.1% in August.

New Zealand’s service sector purchasing managers index in September printed below the 50 level than separates improvement from deterioration. This was the second straight sub-50 result, but at 46.9 versus 35.4 in August, the rate of contraction slowed significantly.

Today’s menu of U.S. data releases will include industrial production, capacity usage, the National Association of Home Builders housing market index, and Treasury-compiled monthly capital flows.

Former U.S. Secretary of State Colin Powell has died of complications from Covid-19. This just-breaking news comes as the latest wave of infections and cases to hit the United States seems to be receding. But at over 83k and 1.5k, respectively yesterday, the mounting toll remains excessive. Two milestones that will be reached before too much longer will be 5 million deaths globally and 750k deaths in the United States.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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