US inflation – less and less transitory
US inflation data for September remain strong. Headline inflation stays at 5.4% yoy, the sixth reading in a row above 4%. Core keeps running at 4%, and the price increases remain broad based, with shelter, food and services ticking up together with “bottlenecks items” such as used cars. Solid demand, energy increases and supply bottlenecks make the case for transitory inflation weaker and weaker, as we pointed out in May and reiterated in our recent webinar. Policymakers are gradually budging too. Several Fed speakers are now less confident about inflation durability, and Fed minutes this week highlight that the cost of easing is close to outweighing the benefit. November taper is now a given. Front-end rates are taking the lead in rates, suggesting the market is pricing more hikes. As policymakers will give in on transitory, market will follow, paving the way for wider rates for longer.
China – PBOC to the rescue
Chinese authorities are finally giving signs of life regarding the current real estate crisis. On Friday, the PBOC explicitly asked banks to loosen lending policies for real estate developers, and stressed in a press conference that outside Evergrande the property sector remains sound. The communication follows micro steps towards easing, such as relaxations of FX caps for developers and discussion of mortgage quota easing. After defaults / restructurings for c.$30bn in the sector, the government is moving its focus on growth, given the high weight of the sector for the Chinese economy and its key social role. The government blink may have strong implications for the China HY market, given the large proportion of debt trading now at distressed levels in the sector. The next step is likely to be proper monetary easing, likely via RRR cuts in the next few weeks.
Turkey – the only rate cuts in town
The Turkish government continues to signal its appetite to ease monetary policy, in clear counter-trend vs the rest of the world. After the 100bp cut in September, the government has removed the most hawkish members of the monetary policy committee, signaling a likely cut next week. With inflation running at 20% and not ticking down, further cuts are quite at odds with the position of Turkey in the cycle, and may trigger more fears in Turkish assets. In fact, a further erosion of real rates is likely to translate in local FX demand, challenging the weak reserve position of the central bank. With all global economies tightening and a tiny external buffer, Turkish authorities are playing with fire, and Turkish markets may be set for another “hot” winter.
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