Macro update

Global macro


The overnight CPI print showed the largest leap since 2010. To an extent, there is no surprise here, in that the backlog associated with reopening demand, meeting COVID induced supply side disruptions, means a surge in price, and by price, we mean in everything from commodities to used cars.

US Futures

You can see the timing of the data release, and the subsequent market reaction (US S&P futures shown below, 10.20pm, selling off). Not dramatic, but, quite visible.

Interestingly, the market does have an amazing knack of being largely uncaring, or unconcerned, about an upcoming or forthcoming data point that is well flagged, well foreshadowed, for weeks prior, and then suddenly caring very much. Asset allocation is often about correctly guessing when it will care.

The size of the “surprise”, when measured in standard deviations, is about a 6x event. That’s big, so some reaction is warranted.


We’ve flagged a number of headwinds for the market, and risky assets more broadly, for some time, as justification for trimming our equities allocation into strength.

The first narrative is that markets are richly valued. When we look at the equity risk premia, we see, on a range of frames, an expensive looking market.

Similarly, when calculating an “intrinsic” market PE, using macroeconomic fundamentals (like potential output, R* and the natural rate of interest) we can see a materially elevated market multiple.

The second narrative is that higher inflation, or at least more prints like this one, tests the “low-interest-rate-thus-risky-asset-friendly” resolve of the central bank.

Janet Yellen, Powell’s predecessor, commented only last week that rates might need to rise, a view assuredly taken negatively by the market zeitgeist.

The third is that there’s no guarantee that the stock market, which is the net present value of future cashflows, should see higher corporate profits, driven by a strong economy, if the gains are eaten by wages, or if the oscillations in prices associated with inflation make managing margins and inventories more complex. A clear example of this is home builders, trying to deliver on contracts struck months prior, when steel prices, copper prices, and other building material inputs are increasing by 3-4% per month. Someone, somewhere, wears the pain.

We remain happy to sit with our underweights to shares at the diversified investment portfolio level, and with our underweight to Fixed income, which unambiguously does poorly when inflation rises, and when nominal yields rise to incorporate inflation.

We still expect the effects of material inflation prints to be short lived, indeed transitory, as bottlenecks eventually get unwound and markets clear, but in the interim, when coupled with our comments about starting valuations, and interest rates, combine to support the view.

Note, however, that the Fed is almost certain to make soothing noises about how an “average” inflation target means some overshoot, (indeed, required, when you have a period of undershooting) and that may well calm market jitters in the near term.

Aus macro

Australian budget

There’s little we would add to the already ubiquitous analysis of the budget.

Seemingly gone, for now, are the days of proposed policy which would materially impact a given stock or sector. By which I mean a Resource Super Profits Taxes (or Minerals Rent Resource Taxes, as it became known). Or sweeping changes to fringe benefits taxes, which affects the SG Fleets and the McMillan Shakespeares, of the world. Or the changes to negative gearing, and capital gains taxes, which would have had such a material effect on housing markets, banks, and builders.

This budget had really none of that sort of thing.

And, while we spend a lot of time trying to parse (understand) market narratives, it is often instructive to “nod” in the direction of the efficient market hypothesis, and to see what the constellation of asset prices has to say about the budget.

And it wasn’t much. No material stock or sector swings, in aggregate. Even stocks that were net beneficiaries, such as childcare (G8 Education) had little observable impact either way.

The travel stocks were affected by the ongoing “pushing out” of the international borders commentary, which now appears to comfortably include 2022. As such, Sydney Airports, Flight Centre, Webjet and Qantas all sold off.

But for the most part, the Aussie market was more affected by global developments. The quickest “sure fire” way to know if the budget was deemed “a disappointment” relative to expectations was if the dollar fell, and it did, if only modestly.

So, whilst many budgets can drive stock and sector changes, or portfolio construction more broadly, this isn’t one.

The iron ore windfall looks to be mostly spent (about 80% of it, over the forward estimates), meaning no lurch towards austerity, or a quicker than expected return to surplus, and that is good and sensible policy, which, all else equal, is supportive to the equity market.

That spending is set to be higher, seemingly permanently, as a share of GDP, will almost certainly provoke the ratings agencies, but again, we think such a downgrade will have little effect.

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Please note that past performance is not a reliable indicator of future performance.

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