The Week’s Talking Points: Surprise, Surprise!

In ‘The Week’s Talking Points’, Niraj Shah studies how top business leaders and market makers are navigating the pandemic-altered financial landscape.

China and the United States vowed to work together to slow global warming, issuing a surprise joint statement Wednesday that injects new momentum into the last days of global climate negotiations. The deal also marks a rare moment of cooperation between superpowers locked in geopolitical rivalry and who seemed at odds for most of the fortnight-long talks in Glasgow, Scotland. But if you are among those that don’t see much of a surprise in tall statements made by political leaders, there are other ‘surprises’ that financial markets are adjusting to.

The Global Inflation Surprise

The world’s three largest economies — the U.S., China, and Japan — each released inflation data that eclipsed consensus forecasts and showed prices rising at the fastest pace since at least the early 1990s. It was the highest print in more than 40 years in Japan, and all of this data came in a span of 24 hours. Germany, the fourth-largest economy, also confirmed the highest producer price inflation on record. For #5 and #6, the situation is starting to look grim as well. The British Chambers of Commerce said 80% of businesses in the United Kingdom are feeling the effects of higher prices as well as shortages of goods and workers, a finding that adds to concerns about inflation. Back home in India, almost every corporate that BloombergQuint has spoken to in the last 30 days has complained of higher raw material prices and the need to undertake price hikes. Is there a sustained high-inflation surprise possible, now that everyone is talking about it? Or will the surprise actually be that it is transitory? Equity markets would be hoping for the latter. The question is, will a higher print surprise the street, or is the street now pricing it in?

How A Surprised India Inc. Could Add To Inflationary Pressures

With raw material costs shooting up and supply chains still broken, many companies have found no choice but to hike prices to maintain margins. Pidilite, the largest adhesives business leader by a country mile, admitted to supply chain pressures, a lament that was restricted to unorganised sectors a few months ago. Astral, the largest pipes company spoke about how it has undertaken a 12% price hike to offset cost pressures. Asian Paints, the largest paint company undertook a price hike in October as well. The heat is now being felt by one and all, as this Bloomberg report rounds up.

Global Interest Rate Surprises Ahead?

The multi-trillion-dollar global question, as posed by a market veteran in an offline conversation, was whether we will see a continuation of the 21st century trans-Atlantic ‘financial repression’ where interest rates have been kept at rock bottom; or the aggressive monetary action, ‘kill-inflation-at-any-cost’ Paul Volcker like strategy. Former CLSA strategist Russell Napier told BloombergQuint in an earlier conversation that he sees the developed world using this “kind of ‘Licence Raj’” repression strategy.

Macro strategist Maneesh Dangi and a few others differ and think we might see the west go after inflation aggressively.

If so, are we in for rate tantrums ahead, on capital flows? Sunil Singhania of Abakkus Investment believes that large global rate hike fears are misleading. The Singhania camp believes that crude oil prices are driving a lion’s share of inflationary pressures and these prices will cool off in the months to come. You will be able to hear this and more from him on ‘Alpha Moguls’ next Thursday.

Surprised At The Strength Of Cryptocurrency?

As Tracy Alloway noted on Bloomberg, for Bitcoin, the importance of the “inflation hedge” driver has shot up dramatically just in the last few months. Back in 2017, it drove 20% of price movements compared to half today. And if that is indeed the case, then with the inflation expectation starting to raise eyebrows, a move in Bitcoin should not. The views on this continue to remain extremely divided, but there should not be a surprise element in the moves if this chart is any indication.

From an equity investor’s perspective, some inflation is welcome. Price hikes undertaken will only aid earnings, a scenario which the market usually likes, as long as the macro construct does not alter too much. For India, a cool-off in crude prices would be the much-needed antidote, as it takes care of inflationary pressures as well as the Balance of Payments. Does it happen soon, and if it does not, does it hurt the markets? We will surely know the answer by the time the financial year ends.

Niraj Shah is Markets Editor at BloombergQuint.