Markets again concerned about inflation

And just like that, we’re back to financial markets schizophrenic flirtation with inflation. Not enough meds have been ingested clearly because all the talk was of ebbing inflation fears after Friday’s mammoth Non-Farm Payrolls miss. Yet overnight, the inflation ghoul reappeared as US yields moved higher, and technology stocks were hammered as cyclical rotation once again moved to the Dow Jones.


Some mentions have been made that the Colonial Pipeline cyberattack could lead to a spike in fuel prices, pushing up, you guessed it, inflation. That is nonsense, of course. Only a prolonged shutdown would show up in the data, and parts of the system are already being bought back in line. To be sure, we have some inflationary hurdles this week, notably in the US, where official inflation is released tomorrow, followed by 10-year and 30-year auctions. However, if the JOLTs Job Openings for April come in much lower than the forecast 7.5 million jobs tonight, I expect the inflationistas to breathe easier once again.


That is not to say that I am now dismissing the inflation threat. What is most interesting about the price action overnight is how quickly the inflation theme has remerged. Precisely one day, in fact, after a very deflating US jobs number on Friday. A very dovish set of comments from Chicago Fed Evans were also ignored. Inflation nerves just won’t go away. I continue to maintain that the power of the commodity price rally and the expected GDP growth in the US is inconsistent with US 10-year yields remaining at 1.50%. Despite the liquidity ocean looking for a home, and whether or not the inflation is transitory or not.


The falls overnight on equity markets, notably technology, are likely to be just as much due to extended shorter-term valuations and nervous investors than to inflation prospects. Goldman Sachs may also be partially responsible, publishing a report on technology stocks highlighting that regulatory risks are the biggest threat to the big-tech story. Readers will know I have alluded to the same theme before; although I do not consider myself a Master of the Universe and don’t consider lunch is for wimps, it’s nearly as important as breakfast. But Goldman’s moves markets, though, as evidenced by their bullish commodity report yesterday and early Asia rallies in the space.


Asian equities, particularly North Asia, have opened much lower today after the fall by the Nasdaq overnight. I will stick my head out and say the Nasdaq fall bears monitoring. The index closed below its upward 14-month support line overnight, the first time since the lows in March 2020. It also closed below its 100-day moving average (DMA), another warning sign. The Nasdaq needs to recapture 13,350.00 tout suite or a substantial correction lower on the cards, targeting the 200-DMA around 12,500.00. The S&P 500 and Dow Jones look much healthier by comparison, with their March 2020 support lines still far from present levels. Cyclical rotation, anyone?


On the inflation theme, China’s Official Inflation and PPI data came in almost bang-on expectations today. Inflation YoY for April rose 0.90%, while PPI YoY for April rose 6.80%. The latter reflects the rise in oil prices, commodities and other inputs. But whether this translates to higher factory gate prices from China is another thing altogether. That’s not been the case in the past, but maybe this time it will be different?


Philippines GDP disappointed yet again as Covid-19’s eternal lockdown and swine flu in the pork industry torpedoed growth once again. GDP YoY fell 4.20%, lower than the -3.0% forecast but better than the previous -6.8% fall. Indonesian Retail Sales fell by -14.60% YoY in March, distorted by base effects but highlighting that domestic demand remains crimped even as exports recover. Again, that is a slight improvement over the previous -18.1% print. The best that can be said is that the Philippines and Indonesian data is improving a very low base. That reflects most of ASEAN, with vaccination programmes proceeding at a snail’s pace and leaving them vulnerable to Covid-19 waves and tourism sectors in a deep freeze. Nevertheless, with high beta to the cyclical recovery, assuming all go well, and starting from a low base, ASEAN markets remain my favourite recovery trade.


On the theme of Covid-19, Malaysia also releases GDP today and is expected to show the same trend as the Philippines. Negative but recovering of a low base. However, that is likely to be drowned out by the announcement yesterday of a dramatic tightening of Movement Control Orders across the entire country for the next month. Like Thailand, Covid-19 cases have been spiking in Malaysia, prompting government action. Indonesia also has a bullet to dodge, having cancelled Eid-based movement for two weeks by air, sea and land. A large portion of the ASEAN recovery rests on how the next two weeks play out across the region with Covid-19.


Otherwise, the data calendar is strictly tier-2 across Asia and Europe today, with the German ZEW Economic Sentiment Index only passing interest. Investors will be more interested in if the equity sell-off deepens and broadens, or if this is another wax-on, wax-off day with the gnomes of Wall Street deciding that inflation isn’t such a worry tomorrow after all. Watch the US JOLTS Job Openings and the ISM New York Index for April, though. With the street on inflation-alert again, high prints could deepen the technology sell-off.