Week in Review: U.S. Inflation Front-of-mind

U.S. inflation was front-of-mind amongst investors this week, with the hope that the August data release would provide some insight into the Federal Reserve’s policy meeting next week. Key to the Fed’s outlook on when to taper monthly bond purchases and hike interest rates, remains the debate as to whether inflation is transitory or structural.  Softer-than-expected U.S. inflation data released on Tuesday eased short-term expectations.

U.S. headline inflation rose 0.3% month-on-month, a touch below the 0.4% consensus, while core inflation (excluding food and energy sectors) rose by 0.1% (consensus 0.3%). The year-on-year rates slowed to 5.3% from 5.4% for headline inflation while core inflation slowed to 4.0% from 4.3% - a more benign outcome than expected. In contrast, retail sales surprised to the upside, with August retail sales (excluding the auto sector) increasing by 1.8%, compared to expectations for a small decline.

China's economy weakened further in August after regulatory tightening and stringent measures to curb another Covid outbreak weighed on consumer spending and travel. Retail sales growth slowed sharply to 2.5% from a year ago, missing consensus. Industrial output growth decelerated to 5.3%, also below estimates. Fixed-asset investment in the first eight months was largely in line with projections, rising 8.9%.

Meanwhile, KFC operator Yum China Holdings said on Tuesday its adjusted operating profit would take a 50% to 60% hit in the third quarter as the spread of the delta variant in China led to restaurant closures and “sharply reduced sales.

UK Inflation increased by 3.2%, the highest figure in almost a decade, pushed up by higher food and restaurant prices. Unemployment decreased to 4.6% in July. This compares to a registered reading of 4.7% in the prior month.

Staying with the UK, a report has shown that Covid-19 killed 640 fully vaccinated people in England in the first half of this year, or only 1.2% of the total 51,281 Covid-19 deaths in England between Jan. 2 and July 2.

Italy will require all workers to have a valid Covid-19 passport as Prime Minister Mario Draghi moves to set the toughest vaccination requirements in Europe.

Except for the Nikkei 225 Index (+0.39%), global equities were softer this week. In the U.S., the Dow Jones (-0.07%), S&P 500 (-0.57%) and Nasdaq (-0.47%) were all weaker. Similarly, the Euro Stoxx 50 (-0.95%), FTSE 100 (-0.93%) and Shanghai Composite Index (-2.41%) were all weaker.

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Market Moves of the Week

With South Africa’s 2021 Municipal Elections going ahead on 1 November, a corruption survey released this week suggests that corruption in SA has got worse under Cyril Ramaphosa’s administration, in contrast to much more positive perceptions when he first entered office. This is according to the 2021 Afrobarometer survey, an independent pan-Africa research network that interviewed 1,600 South Africans in May and June this year.

Stats SA reported that South Africa’s retail sales decreased by 0.8% year-on-year in July 2021. The largest negative annual growth rates were recorded for retailers in household furniture, appliances, and equipment (-10.2%).

The JSE All Share Index ended the week down -2.23%, led lower by the resource (-6.92%) and industrial (-0.80%) sectors, whilst financial shares (+1.22%) managed to end the week in positive territory. By Friday close, the rand was trading at R14.74 to the U.S. Dollar, weakening against all the major developed currencies this week.

1Market Moves of the Week_19 Sept 2021
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Chart of the Week

In recent months, an ongoing debate amongst investors and central banks has focused on whether higher inflation is transitory or structural. Because of the effects of the Covid-19 shutdown whereby demand was cut off and prices collapsed, an unnaturally low base was created, ensuring high year-on-year inflation 12 months later. One way to compare inflation is to rather look at 24-month inflation rather than 12-month inflation rates. The chart shows two-year inflation going back 70 years. On this basis, the rate since August 2019 is nothing to write home about yet.

Chart of the Week_19 Sept 2021

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