background image background image background image

Are equities ready for non-transitory inflation?

Equities 7 minutes to read
Picture of Peter Garnry
Peter Garnry

Head of Saxo Strats

Summary:  The US jobs report on Friday showed that the interest rate sensitivity theme is not over yet, but given the 17% EPS growth in Nasdaq 100 over the past two fiscal quarters the impact from rising interest rates and inflation should be less than the 12% drawdown back in February and March. We also take a look at the surprise Chinese PPI figure today and what it means for US CPI figures on Wednesday. We also outline the various factors behind deflationary and inflationary pressures in the economy today. Finally, we show which US companies could benefit from the $1trn US infrastructure bill which is set to pass today in the US Senate.

The US jobs report on Friday extended the recent rally and turnaround in US yields. Last week we got two news marking an interesting pivot point in US yields; a hedge fund called Alphadyne had lost $1.5bn betting on higher interest rates and Japan’s public pension fund, the largest in the world, announced that it had cut its US Treasury weight from 47% to 35%. Both events signalled an inflection point and the much stronger than expected US jobs report on Friday took the US 10-year yield as high as 1.30%. The reaction in US equities could not have been more divergent. Nasdaq 100 futures decline substantially while S&P 500 futures cruised higher on the strong labour market data. In other words, the interest rate sensitivity theme is back in growth and technology stocks.

Source: Bloomberg
Source: Bloomberg

While the US 10-year yield is a bit lower today, the signal in the noise today is the worse than expected PPI figures out of China showing a higher degree of persistency. This suggests that there are upside risks to inflation as highlighted by Clarida and Weidmann last week. China’s PPI figure is an interesting lead into the US CPI report on Wednesday which, if showing a hot m/m reading and the rent component picking up, could put enormous pressure on the Fed to change its language and outlook for inflation setting Jackson Hole up later this month to be one of the key events to shape markets for the rest of the year.

Source: Bloomberg

What is the impact on technology stocks and Nasdaq 100 from rising interest rates? The drawdown back in February and March of this year was 12%, but we do not expect the same drawdown if the US 10-year yield goes back to 1.8% because EPS is up 17% in Q1 and Q2 combined. In other words, if earnings growth for technology companies remains robust it will counter some of the higher discount rate from higher rates. For now we remain constructive and positive on equities despite higher inflation in the short-term and we believe investors so far have been correctly discounting the inflationary and economic outlook.

The drivers of deflation and inflation

The Fed and many bond investors have bet on inflation to be transitory. Many of the underlying drivers are well-know. Demographics in the developed world is a drag on economic growth and will keeps savings high and interests and inflation low. The current period of technological change with digitalization and automation Is deflationary by nature and is perceived to be stronger than in previous long-term economic cycles. Low productivity growth and low real-rate economic growth in the developed world coupled with high debt levels will put a natural lid on inflation and interest rates.

But what are some of factors that could lead to sustained higher levels of inflation? The four main pillars of higher inflation are:

  1. Decarbonisation of the economy which will lead to the world adopting technologies for electricity production that are currently at higher cost curves compared to natural gas and coal, which put upward pressure on energy prices and thus feed through to all the economy. Decarbonisation policies have recently led Canada to limit supply of wood for sawmills in the US due to the environment which has made it more costly to produce lumber for housing construction. Weather patterns as a function of warmer climate is also increasing volatility in our agricultural production and that is expected to increase over time leading to more food inflation.
  2. Urbanisation in Asia will together with electrification of the transportation systems in the developed countries and the green transformation drive a usually high demand for certain commodities and underpin a new supercycle in commodities.
  3. Tensions between the US and China will dictate a reconfiguration of global supply chains which longer term will mean production will increasingly be spread out across more countries which is logistically more expensive, and China has kept input costs very low since 2001 to gain employment and manufacturing market share. But China is now putting a higher weight on its environment which will lead to China likely “exporting” more inflation going forward.
  4. The EU border tax will put taxes on goods produced with high carbon intensity forcing developing countries exporting goods to the EU to adopt technologies that are less carbon intensive which in the short run will be more expensive and thus inflationary in developed consumer markets.

US infrastructure bill and construction related equities

The Senate is set to convene at 1600 GMT today in what looks like the US will get a $1trn infrastructure bill in the most constructive bipartisan agreement in years. The bill adds further and much needed stimulus to the US infrastructure sector which is desperately in need of funds. In the table we have highlighted the US companies with a market value above $5bn within building products, construction & engineering, and construction machinery. These companies could get a boost from the infrastructure bill in the years to come.

NameMkt cap (USD mn.)Last priceP/EReturn YTD (%)Return 5Y (%)
Caterpillar Inc114,066208.3523.3616.22188.22
Johnson Controls International plc51,33072.0728.5556.0491.84
Carrier Global Corp48,92156.3842.5550.27NA
Trane Technologies PLC46,809197.0034.6736.67308.34
Cummins Inc32,898229.0815.311.97110.54
PACCAR Inc27,78880.0415.90-6.5965.07
Westinghouse Air Brake Technologies Corp16,28286.1330.1118.0122.98
Masco Corp14,93660.4317.0610.7274.35
Fortune Brands Home & Security Inc13,75199.7318.5217.0067.39
Quanta Services Inc12,85192.3523.8128.40276.00
Lennox International Inc12,406333.8024.8822.46123.79
Allegion plc12,337137.5424.3218.84102.46
Trex Co Inc12,142105.2762.6025.74610.68
A O Smith Corp11,40871.6726.2732.3264.17
Carlisle Cos Inc10,712205.5132.7632.40109.22
Owens Corning9,88395.8311.8727.6992.35
Builders FirstSource Inc9,79947.298.4115.88276.51
Advanced Drainage Systems Inc8,165115.7243.0138.70363.59
Oshkosh Corp7,890114.9518.9634.33128.70
MasTec Inc7,00494.2518.8438.24233.63
EMCOR Group Inc6,522121.3320.5433.12119.47
WillScot Mobile Mini Holdings Corp6,46928.6032.8523.44193.33
AZEK Co Inc/The5,83237.69NM-1.98NA
Armstrong World Industries Inc5,206109.3632.1247.96154.52
Valmont Industries Inc5,078239.3924.9137.4395.12

Source: Bloomberg and Saxo Group

The five-year chart below of Nasdaq 100 futures vs S&P 500 futures is for compliance reasons

Source: Bloomberg


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.