Global inflation ticks up, but not in China

Global inflation ticks up. So far 39 of the world’s 50 largest economies have reported consumer inflation for August. Median inflation ticked up to 4.8% from 4.7% last month, ending an eight-month streak of consecutive declines.

Of the countries that have reported, 62% saw inflation surprise on the upside, the highest percentage since March last year.

The consensus view is that inflation is unlikely to be a problem in 12 months.

The US was one of the countries to see inflation surprise on the upside, with inflation at 3.7% vs the consensus forecast of 3.6%.

Monthly inflation was at 0.6%, the highest reading since June last year.

However, it was largely fuel that drove higher inflation. If oil prices stabilise, then consumer inflation should start to decline again from next month.

Month-on-month inflation would need to average around 0% to get annual inflation in line with 2% by January next year.

Core inflation dropped to 4.3% from 4.7%, in line with consensus.

Shelter is the primary reason core and headline inflation remain elevated; headline inflation ex-shelter is currently at 2%

Shelter inflation is heading down though. The current reading is 7.25%, down from a peak of 8.2% in March.

China still has very low inflation. Chinese consumer inflation came out at 0.1% in August, in line with consensus forecasts.

Chinese producer inflation is running at -3%, suggesting further low Chinese CPI readings ahead – as well as lower inflation readings for goods across the globe.  

More mixed messages from the US economy.  In August retail sales were up 0.6% month-on-month vs the consensus of 0.1%. It was the second beat in a row.

Even so, retail sales are still only up 2.5% year-on-year.

Industrial production also surprised on the upside, up 0.4% month-on-month vs the consensus forecast of +0.1%.

On the flip side consumer credit growth slowed again in July and US bankruptcies are running at a similar rate to the Covid period. Outside of the Covid period, the current year-to-date total is the highest since 2010.

Significant risks are building for the fourth quarter too. US student loan repayments kick off from 1 October, which could shave around 0.5% off consumer discretionary spend.  At this point, it seems likely that there will be a government shutdown commencing on 1 October in the US. The partial shutdown in 2018/2019 took between 0.1% and 0.2% off growth each quarter.

Tracking the path of the US economy.  Nonfarm payrolls are following the same trend as previous periods post the initial yield curve inversion. This trend implies that nonfarm payrolls will peak in March 2024.

The trend in industrial production is unclear this time around, but industrial production tends to collapse 15 months after the yield curve inversion, more or less at the same time as the labour market starts to weaken.

Manufacturing PMI data has been particularly weak this time post the US yield curve inversion. It has picked up in the last two months though.

And while the economic data is roughly tracking the historical trend post-inversion, the market is not.

Typically, the Fed cuts just before a recession officially starts. There has been a notable change post-1990.

The Fed typically cuts around 300bps in the nine months post the start of a recession.

The market says this time will be different.

Typically 10-year bond yields are down post the start of a recession, with Treasuries typically outperforming both the S&P 500 and gold, especially at the start of the cutting cycle.

Chinese data starts to turn.  Chinese retail sales were up 4.6% year-on-year in August vs the consensus forecast of +3%. 

Industrial production beat too at +4.5% vs the consensus of +3.9%.

Total social financing also surprised on the upside, and the three-year average is now down just 7% year-on-year.

To top it off the People’s Bank of China cut the required reserve ratio for banks to 10.5% from 10.75%.

There’s a disconnect between Treasuries and commodity prices. Typically the ratio of the copper to the gold price correlates with the US 10-year bond yield. The reason is fairly intuitive – if copper, an industrial metal, is outperforming gold, a ‘risk-off’ asset, it typically implies that global growth is picking up and we should pencil in higher inflation. A combination of higher growth and inflation should be reflected in higher nominal bond yields. That’s typically how it works but the period since 2022 has been fairly anomalous.

The issue is not inflation expectations, which are still roughly following the copper/gold ratio.

The issue is real yields, which have shot up in the US without a strong signal from either commodities or inflation expectations.

Calm global equity markets. Despite the economic uncertainty, global volatility remains low. On Thursday last week, the Cboe Volatility Index (VIX) reached 12.82, a new post-Covid low. Implied volatility has dropped off for equity markets across the globe.

Bond market volatility has retraced slightly and currency volatility is back near decade lows. The last time the S&P 500 had a +2% day was in February.

ECB hikes. Last week the European Central Bank increased the deposit rate to 4%, the 10th consecutive increase. President Christine Lagarde signalled that this could be the last hike in this cycle but didn’t completely rule out further increases to deposit rates. The market is pricing rates in Europe to be flat until April/June next year.

The market is pricing rates to be kept flat in both the US and Europe, with one more 0.25 percentage point (25bp) increase to come in the UK.

SARB preview. The SA Reserve Bank's Monetary Policy Committee is due to announce any potential changes to the repo rate on Thursday. 17 out of 19 contributors to consensus are of the view that the repo rate will not be changed, while two say it will go up by 25bps. Our base case is no change at this meeting.

SA consumer inflation for August is due to be published on Wednesday. The consensus view is that consumer inflation will have ticked up to 4.8% from 4.7%. Our model forecast is a shade higher at 4.9%. However, we still expect inflation to end the year well within the band, at 4.8%.

EV sales ramping in the US. Electric vehicles (EVs) accounted for 7% of new vehicle sales in the US in the first half of the year. Currently, nearly one million new EVs are being sold per year.

Despite the surge in demand, battery prices continue to decline.

EVs are chipping away at fuel demand but so is working from home. According to a recent study from Econpol, a European think tank, working from home has depressed road fuel demand at a similar scale to EV use.