Inflation matters

Major US indices remained slightly offered yesterday, as the IMF cut its global growth estimate from 6% to 5.9% in 2021, while leaving the expectation of a 4.9% growth for 2022. The US growth forecast has been lowered from 7% to 6%, mainly due to supply chain constraints. 

The supply chain constraints seem to be getting worse at some places, but better in others. Apple faces important decrease in iPhone production and could cut the production target for its iPhone13 significantly in the last quarter. But on the other hand, Vietnamese assemblies that serve Intel and Samsung may start operating at full speed by next month, coming back to normality after the Covid-led shutdowns, and Toyota plans to resume its car production thanks to a rebound in shipments from its suppliers.  

Now coming back to Apple, it is now said that Apple, which came out of the Chinese crackdown measures quite unharmed so far, could now see the pressure increased. Beijing will probably not forbid the iPhone sales or close Apple shops, but the government now allows users to sue Apple. Moreover, the Chinese government which has been slapping its own tech firms for giving their employees excessive work and perhaps not enough money could go after Apple, where the assembly-line workers certainly work longer hours for earning less than their US peers. And that could hurt the 40% profit margin the company makes on products built in China.  

The possibility that Beijing could extend crackdown beyond its borders could further dampen the overall market mood, at least for companies that were allowed to do business in China so far. 

Elsewhere, the supply chain constraints, and the rising oil prices continue fueling the worries of a longer and stickier inflation in the US and elsewhere.  

Due today, the US CPI data will reveal how bad the 13% rally in US crude prices impacted the consumer price inflation in September. The expectation is a steady read at 5.3%, but the chances are we will see a stronger number rather than a softer one at today’s release. And a strong inflation will only reinforce the expectation that the Federal Reserve (Fed) would start tapering its bond purchases by next month, that’s already priced in. Yet, a too strong figure could boost expectations of an earlier rate hike from the Fed, and that’s not necessarily fully priced in.  

Also due today, the latest FOMC minutes will likely reiterate the Fed’s willingness to start tapering the bond purchases soon and could give a further insight regarding the need and the possibility of seeing the rate normalization happen before 2023. 

We lately started seeing an acceleration in the US 10-year yield, which is now above the 1.60%, and a strong inflation figure could further boost the yields and weigh on equity appetite.