International Communique No. 302 – 18th of August 2021


Main indices continued gaining last week in spite of pandemic-related angst and pricey share valuations, as inflation clocked in on expectations and the US Senate waved through the USD 1 trillion infrastructure drive. If the bill then passes through the House of Representatives, it will unleash an unprecedented amount of investment expenditure on roads, bridges and airports. Talking of roads, the road will probably be long before the 3.5 trillion welfare plan championed by the Democrats can make it over the finish line, given the plethora of amendments.

Much of the good news is already reflected in share prices. Yet the proportion of buy recommendations is hovering at its highest level in a decade, while solid earnings growth is powering a patchy short-term uptrend. The main markets have started this week in the red, pinned back by disappointing economic data out of China pointing to a slower economic growth. Meanwhile, the increasing chaos in Afghanistan, with the capital Kabul falling into the hands of the Taliban, is stoking geopolitical uncertainty. The flight to safety has been lowering government bond yields and sending the US dollar and the yen higher.

In the US, the consumer price index advanced by 5.4% year on year in July, in line with estimates. The core component, which strips out food and energy prices, was ahead by 4.3% year on year. However, the price growth in some hot segments such as second-hand cars has started to ease, rising by just 0.2% in the latest figures compared with upwards of 7% in previous months. This suggests that the inflation peak could be near, which if so would leave the Fed more time to extricate itself from its ultra-loose monetary policy.

Chinese retail sales – the bellwether for domestic spending – were up 8.5% in July, which was far less than expected. The slower growth number can be pinned on the rapidly spreading delta variant and the hit sustained by some local economies from natural disasters. Industrial production growth also cooled off, clocking in at +6.4%. In Japan, GDP rose by 0.3% in the second quarter but left the stock market impassive as the latter headed down on news of the spreading pandemic. A record number of coronavirus cases (20,000) was recorded last Friday and Saturday.

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