Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Inflation Watch: China PPI, Empire Prices, NFIB Survey
Summary: Momentum continues to build across a suite of inflationary reads. We run through the latest in global survey data and the read through for inflation.
Although the move higher in long dated yields in the US has stabilised since our last Inflation Watch update there is no shortage in inflationary reads and pricing pressures across various survey data. Eurozone yields have picked up the baton and are pushing higher and as the growth backdrop continues to improve alongside strengthening inflation expectations UST yields will soon follow suit, resuming their march higher toward 2%.
The good news continues to roll in for growth with a slew of positive economic data delivered in recent weeks. Granted favourable base effects are playing their part in the year over year acceleration in the data (and will continue to do so) but on some measures 2019 levels are being surpassed. All told the economic cycle continues to accelerate which remains the driving force propelling equity markets in the near term.
However, once that rate of change turns, focus will likely shift to the impact of rising input costs and widespread price pressures and the prospect taxes hikes – likely a more difficult period to navigate. Remember, everything happens at the second derivative!
China PPI
Rising PPI inflation in China could drive US CPI inflation materially higher and is another indicator of price pressures. Through March the China producer price index rose 4.4% from a year earlier, and 1.6% from the prior month.
Base effects have contributed to this move higher but are not the full story. Increases in prices across almost the entire commodity complex, from copper, coal, and oil, to battery metals and rare earths, is hitting factory gate prices. The impact of increased prices across the commodity complex will continue to flow through to PPI over the coming months, as will base effects continue to contribute to higher PPI reads. As the effect of increased commodity prices continues to flow through to PPI inflation we could see this number heading toward 10% in the coming months.
An uptick in factory gate prices in China has historically held a close relationship and high positive correlation with US headline CPI. As supply side bottlenecks build, demand picks up and input prices continue to move higher, output prices will likely follow.
NFIB Small Business Survey
According to the survey 34% of firms plan to increase selling prices. The last time this survey read was seen, headline CPI was printing above 5% YoY. It is clear pandemic fatigued consumers with fiscally bolstered incomes and high savings are ready to spend. Confidence is on the up, the labour market recovery is underway and household spending expectations are close to all time highs. Against this backdrop, and with the added impact of rising input costs due to raw materials inflation and supply chain disruptions it is reasonable to expect some pass through to end-user prices.
The NFIB small business survey of job hard to fill has accelerated to an all-time high in March as business report having trouble filling jobs at the fastest pace on record. Small businesses are potentially in competition with enhanced unemployment benefits here, so it is difficult to draw firm conclusions, but it is possible that businesses will have to up the ante in enticing people back to work.
Empire State Manufacturing Survey
Input price increases continued to pick up in March relative to February, rising at the fastest pace in nearly a decade, and selling prices increased significantly.
US ISM Manufacturing PMI
Continues to indicate momentum in price pressures. The survey's measure of prices paid by manufacturers fell slightly from February to a reading of 85.60, vs. 86.00 in February which was the highest since July 2008. Indicating price pressures remain elevated hovering near levels last seen in 2008. The forward-looking new orders sub-index leapt to 68.0 in March - the highest reading since January 2004.
Against incoming easier comparisons (base effects plunge into heart of pandemic) and Covid-fatigued consumers that are vaccinated and ready to spend, inflation will soon be higher. Transfers have bolstered incomes, the labour market is rebounding, savings are elevated and in the US household spending expectations are high. In addition, consumer confidence is on the up. This increase in demand will quickly meet supply constraints and the base effect cliff. Markets have recognised this shift, but inflation is likely to more than “moderately overshoot” based on our methodologies, which is not sufficiently discounted yet.
New York Fed's Survey of Consumer Expectations
It’s not just investors expecting higher inflation, but consumers too. Consumers' expectations for price inflation are the highest in 7 years. Inflation expectations are what people expect future inflation to be, and to some degree realised inflation is governed by inflation expectations. This as economic agents alter their behaviours today based on the expectation that inflation will be higher (or lower) in the future. The data show consumers clearly see inflation rising materially above 2%.
What is the Fed watching?
Recently Fed Vice Chair Clarida, pointed to a measure of inflation expectations closely watched by the Committee. The measure is the “Estimated index of common inflation expectations” and combines various market and survey measures into a single index of households and businesses expectations for price inflation.
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