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With inflation being a topic of concern, the Consumer Price Index (CPI) report was the highlight of the week. Both headline and core CPI came in lower than expected. Core CPI came in at 4.0% versus the prior year and is now lower for two consecutive months. The current backdrop is one of decelerating inflation, decelerating growth, and decelerating liquidity. These all may be temporary, and the causes are often debated, but until they reverse it remains difficult to see upward movement in Treasury yields.
It was a big week for economic data out of China with retail sales and industrial production missing forecasts by a wide margin. However, the more pressing point is what appears to be a commitment in China toward President’s Xi Jinping’s idea of a “common prosperity.” We have noted the fall in Chinese stocks as well as those listed in the United States. Las Vegas Sands and Wynn Resorts were each down more than 15% this week as crackdowns reach the gambling sector. Topping it all off is the fact that the second largest property developer, China Evergrande, stopped making bond payments today, as bankruptcy appears imminent. China Evergrande was larger than Lehman Brothers. The knock-on effects are still to be determined, but China’s largest property developer was down 20% this week on contagion fears.
Normally, the markets would be in a tailspin based on the facts at hand and enormous uncertainty. This has not transpired to this point as investors appear aware that everything rolls up to the sovereign and then China can handle the fallout. They just don’t appear willing to do so at this stage. While this could take a crash scenario off the table, China attempting to manage a deleveraging of their economy would certainly be a crushing blow to the reflation trade. It is likely that China’s policy responses in the coming weeks could be the primary determinant in setting the medium term trajectory of markets.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet, Refinitiv.
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