Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief economist Doug Porter warned that Canadians may have to deal with food prices much higher than they are now,
“To this point, food prices actually had not played a big role in the upswing in headline inflation to an 18-year high of 4.1%. Food from home (i.e., groceries) were up an unremarkable 2.6% year-over-year in August. That’s a bit above the 20-year median increase of just under 2%, but nothing to get excited about. However, the lack of excitement looks like it may be about to end. Industrial product prices have surged in recent months, and notably from food manufacturers. The latest IPPI [industrial producer price index] shows these prices have sprinted 13.1% y/y. There’s about a three-month delay between these producer prices and those on the shelves. Groceries may not jump at the retail level to quite this extent, but the direction is very clear. At the very least, it looks like food is about to make a lot more noise in the CPI story.”
“@SBarlow_ROB BMO: food prices going much higher” – (research excerpt) Twitter
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Citi economist Xiangrong Yu believes the Chinese economy is entering a period of stagflation after a report indicating manufacturing activity contracted in September,
“China seems to be entering into at least a short period of “stagflation”. We recently trimmed our growth forecasts to 4.9% for 21Q3 and 4.5% for 21Q4 and downgraded the full-year projection to 4.9% for 2022 on the Evergrande spillover. Rising production cuts for the power outages and/or the “dual control” post a downside risk ~0.5ppt to our Q4 projection. While relief measures are possible, we see no quick fix to the power shortages throughout the winter. The need to ensure blue skies for Beijing’s Winter Olympics would constitute an extra reason for the government to limit the production of raw materials in northern China. In the meantime, the supply disruptions in the peak season should outweigh the demand weakness induced by the property down-cycle, backing energy and industrial prices. We expect PPI inflation to stay >9% toward the year-end. With CPI muted on the sluggish consumption catch-up, the deep PPI-CPI divergence would squeeze the profit margin of mid/downstream sectors, especially SMEs. When the supply constraints are largely binding, it is simply not appealing to forcefully boost (investment) demand via broad-based stimulus. We see more targeted support in the near term: The anticipated 50bp RRR cut may be advanced to October. The PBoC’s new credit facilities to support decarbonization will likely start to operate soon.”
A Chinese slowdown implies strong headwinds for commodity prices related to construction and manufacturing activity.
" @SBarlow_ROB Citi: China entering stagflationary period” – (research excerpt) Twitter
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RB Advisors, founded by former Merrill Lynch chief quantitative strategist Richard Bernstein, published a report entitled Anatomy of a Bubble. Here are some excerpts,
“We have become famous (or infamous) regarding our views that there is a bubble in long-duration assets [primarily growth stocks, where the majority of future returns are many years out]… The Fed today owns over 50% of the 10-20 year Treasury market! Cornering a market forces artificially high prices or, in the Fed’s case today, artificially low yields. The artificially low longer-term Treasury yields have been a primary catalyst to the bubble in long duration assets. … Bubbles always result in a misallocation of capital. Investors overcapitalize sectors that are “hot”, but sectors of the economy that need capital tend to go hungry… Whereas investors are hyped about innovation, disruption, and visions of the future, many industries today are being starved for capital and are significantly underinvesting. Previous underinvestment has already resulted in shortages and production bottlenecks in some sectors … Perhaps the number one rule of investing is return on investment is highest when capital is scarce … The financial markets appear to be at another opportunity similar to that in 1999/2000 in that many sectors around the world outside of the bubble seem attractive. In particular, we favor assets and sectors that outperform as nominal growth accelerates: energy, materials, industrials, smaller capitalization stocks both within and outside the US, non-China emerging markets, lower quality bonds, and commodities/gold.”
“@SBarlow_ROB From RB Advisors’ “Anatomy of a Bubble”” – (research excerpt) Twitter
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Diversion: “DeepMind’s AI predicts almost exactly when and where it’s going to rain” – M.I.T. Technology Review
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Scott Barlow