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Week Ahead: More US (Headline) Inflation and Consumption, and 75 bp Hike by Bank of Canada

Last month, when the Federal Reserve hiked 75 bp instead of the 50 it had signaled, Chair Powell cited the unexpectedly strong CPI and elevated University…

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Last month, when the Federal Reserve hiked 75 bp instead of the 50 it had signaled, Chair Powell cited the unexpectedly strong CPI and elevated University of Michigan consumer inflation expectations. The June CPI will be reported on July 13, and the preliminary July University of Michigan consumer inflation expectations will be reported two days later.  

This may have been a tactical error, though only one Fed official seemed to think so. Kansas City Fed President George, a hawk, favored 50 bp as the Fed had signaled. While inflation did accelerate, the core rate fell. Moreover, the Fed targets the PCE deflator, which is less sensitive to shelter and energy prices. The problem with citing a preliminary report is that the final report may be different, and indeed, it was. Instead of surging to a new high of 3.3% from 3.0% as the preliminary estimate of 5-10 year consumer inflation expectations had it, the final reading stood at 3.1%, matching the January high.  

It may never be known whether a Fed official helped prompt the press story the next day, suggesting a 75 bp hike was likely. Some bank economists had nearly immediately moved in that direction. The implied yield of the June Fed funds futures contract had a 52 bp of tightening priced the day before the CPI data. It firmed to 57 bp by the end of June 10, when the CPI and University of Michigan's surveys were published. After a good weekend think and the press reports, the market moved to price in 72 bp of tightening.  

The "expeditious" effort to bring the Fed funds rate to neutral and beyond means that the central bank will use any opportunity it gets or creates. St. Louis Fed President Bullard was candid about it. The Fed must ratify what the market does based on the central bank's guidance. Even though some pundits will cringe at the notion of any similarity between Powell and Volcker, it may be recalled that Volcker cited money supply growth to justify what he thought the Fed needed to do in any event.  

The Fed funds futures suggest the market is giving the Fed another option to hike by 75 bp when it meets next on July 27, the day before the first estimate of Q2 GDP is released. The market went into the weekend pricing around 95% confidence in a 75 bp hike. While there are clear signs that the economy is slowing, this is what the Fed is trying is achieve. So rather than deter it, the slowing confirms that the Fed is on the right course.  

Still, the fact that Powell cited the CPI gives the report added importance. The monthly increase will be 1% or higher for the third time in four months. The median forecast of a 1.1% month-over-month gain would lift the year-over-year rate to 8.8% from 8.6%. That would bolster confidence that the Fed will take another three-quarter step. It could also boost the perceived chances of a 75 bp hike in September.   The market has about a 1-in-5 chance instead of  75 instead of 50 bp currently discounted.  

Nevertheless, a change is afoot. Despite the talk of a broadening of price increases, the CPI core rate is likely to slow for the third consecutive month. The core rate is important, not because it excludes volatile food and energy prices as some pundits have it, but because, as Powell noted, it is a better predictor of future inflation. That is to say that over time, the headline converges with the core rate, not the other way around. Market-based inflation expectations, measured by the 10-year breakeven, fell to new lows for the year in late June, near 2.3%, and have been consolidating below 2.4% recently. The two-year break even, which had approached 4.5% the day before the FOMC meeting concluded, tumbled to almost 3.05% in early July and finished a little above 3.20% last week. 

A one or two-tenths rise in the 5-10-year inflation forecast in the University of Michigan's survey does not seem as important as the general trend, and it has been flat though elevated 2.9%-3.1% for nearly a year. Instead, what appears more notable is that the reading of consumer sentiment, which was revised in the final June reading to 50, is associated with past recessions. Sentiment is not just a mental state, but that mental state is shaped by what one experiences directly or indirectly.  

The US also reports retail sales, industrial production, and business inventories. Outside of the headline impact, the data points are essential as economists fine-tune estimates for Q2 GDP. This is particularly important because there is a divergence between two historically reasonably good estimates. The first is the Atlanta Fed's GDP tracker, which sees the economy contracting by 1.2%. The other is the median forecast in the Bloomberg survey. This appears slightly closer to the actual first official estimate than the Atlanta Fed's tracker. The median in the Bloomberg survey is 3.0%, but this may overstate the case. What Bloomberg calls a weighted average is at 1.8%, and the mean is 2.8%. The eight forecasts that have been updated this month have an average forecast of 1.55%. Notably, only one of the 60 forecasts projects an economic contraction in Q2. 

On July 15, China will report monthly June data (retail sales, investment, surveyed jobless rate) and Q2 GDP. Bloomberg apparently conducts two surveys. The monthly poll had 24 forecasts, and the median forecast was for a contraction of 1.5% quarter-over-quarter after a 1.3% expansion in Q1. The other survey, whose results are posted on the economic calendar page, has 10 responses has a median forecast of -2.3%. Perhaps the exact print does not matter.  

The takeaway is that the zero-Covid policy means that the official target of around 5.5% growth this year will not be met. The multilaterals (IMF, World Bank, and the OECD) estimate Chinese growth at 4.3%-4.4% this year. The market is less sanguine. That said, the stimulative efforts and the easing of the lockdowns suggest the possibility of a robust recovery in H2. Of course, with a relatively less effective vaccine and less fully vaccinated people (especially 60 and older), there is the risk of further economic disruptions.

China could reduce interest rates or cut reserve requirements, but its revealed preferences show a cut in the medium-term lending facility (set on July 15) is unlikely. It trimmed the rate by 10 bp in January, which was the first cut since the pandemic moves in early 2020 when it cut the rate by 30 bp. No change in the medium-term lending facility means that the loan prime rates, set on July 20, will also be kept steady.  

The UK reports May GDP on July 13. The monthly GDP unexpectedly contracted in March and April (-0.1% and -0.3%, respectively) and was stagnant in February. The economy has not grown since January, and that was after a 0.2% contraction in December. While we have noted that economists do not expect the US economy to have contracted in Q2, they are less sanguine about the UK. The median forecast (Bloomberg) is for a 0.1% contraction. A quarter of 36 projections have not been updated since mid-May. The average of the last five updates (June 30-July 8wir) estimates that the UK economy shrank by 0.4% in Q2.  

Just as the Fed hiked rates while the GDP was falling in Q1, the market is convinced that the Bank of England will also look through the possible contraction. A quarter-point hike at the August 4 meeting is a foregone conclusion, and the swaps market leans heavily toward a 50 bp move instead (~83%). UK politics may make for good theater but have not been much of a market factor. In the foreign exchange market, sterling saw its recent slide against the dollar extended and two-year lows were recorded (~$1.1875). However, as the cabinet resignations mounted in the first half of last week, sterling rose against the euro and reached its best level in nearly three weeks. It regained some footing in the second half of the week against the dollar.  The $1.2100 area may offer the first hurdle. 

Australia reports June employment figures early on July 14. The Australian labor market is robust: record-low unemployment and record-high participation. It has created an average of almost 61.5k full-time jobs a month through May this year. In the same period last year, the average was 45.5k, and in 2019 it was less than 19k.   After the 50 bp hike on July 5, the market leans slightly (~55%) toward another half-point move at the next meeting on August 2.  

While the RBA and the BOE do not meet until next month, the Bank of Canada meets next week. The swaps market has a fully discounted 75 bp hike on July 13. It would lift the target rate to 2.25%. The market favors a 50 bp hike at the following meeting but has about a 1-in-4 chance of another 75 bp move instead. The year-end rate is seen around  3.50%. The treatment of the Canadian dollar as a risk asset (high and reasonably stable correlation in recent months with the S&P 500, ~0.70) remains dominant. However, we note that the two other factors in our informal model, namely commodity (oil as a proxy) and rate differentials (two-year spreads as a proxy), have also increased correlations. The correlation between changes in the exchange rate and the two-year differential is the highest in five months (~0.38). The changes in the exchange rate and WTI prices increased in May and stabilized in June and into July (~0.43).

The Reserve Bank of New Zealand is widely expected to hike its cash target rate by 50 bp on July 13. It will then stand at 2.50%. With three more meetings after it this year, the swaps market has another 140 bp of tightening priced into the curve. According to current pricing, that could prove to be the peak, even though CPI is running near 7%. This year, the New Zealand dollar's 9.4% decline makes it the worst-performing in the dollar bloc. The Australian dollar has fallen almost 5.7%, and the Canadian dollar is off slightly less than 2.5%.  


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EasyJet share price has collapsed by 53% in 2022. Is it a buy?

The EasyJet (LON: EZJ) share price has hit turbulence as concerns about demand and soaring costs remain. It dropped to a low of 293p, which was the lowest…

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The EasyJet (LON: EZJ) share price has hit turbulence as concerns about demand and soaring costs remain. It dropped to a low of 293p, which was the lowest level since November 2011. It has plummeted by more than 82% from its all-time high, giving it a market cap of more than 2.5 billion pounds.

Is EasyJet a good buy?

EasyJet is a leading regional airline that operates mostly in Europe. It has hundreds of aircraft and thousands of employees. In 2021, the firm’s revenue jumped to more than 1.49 billion pounds, which was a strong recovery from what it made in the previous year.

EasyJet’s business is doing well as demand for flights rises. In the most recent results, the firm said that forward bookings for Q3 were 76% sold and 36% sold for Q4. For some destinations, bookings have been much higher than before the pandemic.

EasyJet’s business made more than 1.75 billion in revenue in the first half of the year. This happened as passenger revenue rose to 1.15 billion while ancillary revenue jumped to 603 million pounds. The firm managed to make a loss before tax of more than 114 million pounds. It attributed that loss to higher costs and forex conversions.

As I wrote on this article on IAG, EasyJet share price has collapsed as investors worry about the soaring cost of doing business. Besides, jet fuel and wages have jumped sharply in the past few months. Also, analysts and investors are concerned about flight cancellations in its key markets.

Still, there is are two key catalysts for EasyJet. For one, as the stock collapses, it could become a viable acquisition target. In 2021, the management rejected a relatively attractive bid from Wizz Air. Another bid could happen if the stock continues tumbling.

Further, the company could do well as the aviation industry stabilizes in the coming months. A key challenge is that confidence in Europe and the UK.

EasyJet share price forecast

EasyJet share price

The daily chart shows that the EasyJet stock price has been in a strong bearish trend in the past few months. During this time, the stock has tumbled below all moving averages. It has also formed what looks like a falling wedge pattern, which is usually a bullish sign.

The Relative Strength Index (RSI) has dropped below the oversold level while the Awesome Oscillator has moved below the neutral point.

Therefore, in the near term, the stock will likely continue falling as sellers target the support at 270p. In the long-term, however, the shares will likely rebound as the falling wedge reaches its confluence level.

The post EasyJet share price has collapsed by 53% in 2022. Is it a buy? appeared first on Invezz.

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August data shows UK automotive sector heading for a “cliff-edge” in 2023

With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly…

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With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly towards the tail end of the yield curve (details of which were reported on Invezz here).

Car manufacturing is a key industry in the UK. Recently, it registered a turnover of roughly £67 billion, provided direct employment to 182,000 people, and a total of nearly 800,000 jobs across the entire automotive supply chain, while contributing to 10% of exports.

Just after midnight GMT, data on fresh car production for the month of August was released by the Society of Motor Manufacturers and Traders Limited (SMMT).

Strong annual growth but monthly decline

Car production in the UK surged 34% year-over-year settling at just under 50,000 units. This marked the fourth consecutive month of positive growth on an annual basis.

However, twelve months ago, production was heavily dampened by a plethora of supply chain bottlenecks, work stoppages on account of the pandemic, and a worldwide shortage of microchips. The August 2021 output of 37,246 units was the lowest recorded August volume since way back in 1956.

Although the improvement in output is a good sign, equally it is on the back of a heavily depressed performance.

Source: SMMT

To place the latest data in its proper context, production is still 45.9% below August 2019 levels of 92,158 units, showing just how far adrift the industry is from the pre-pandemic period.

Since July, production in the sector fell 14%.

The fact that the UK is facing a deep economic malaise becomes even more evident when we look at full-year numbers for 2020 and 2021.

In 2020, total output came in at 920,928 units, while 2021 was even lower at 859,575. The last time that the UK automotive sector produced less than one million cars in a calendar year was 1986.  

Unfortunately, 2022 has seen only 511,106 units produced thus far, a 13.3% decline compared to January to August 2021.

In contrast, the 5-year pre-pandemic average for January to August output from 2014 – 2019 stands well above this mark at 1,030,527 units.

With car manufacturers tending to pass price rises on to consumers, demand was dampened by surging costs of semiconductors, logistics and raw materials.

The SMMT noted,

The sector is now on course to produce fewer than a million cars for the third consecutive year.

Ian Henry, managing director of AutoAnalysis concurred with the SMMT’s analysis,

It is expected that by the end of this year car production will reach 825,000, compared to 850,000 a year ago, but that’s 35% down on 2019 and a whopping 50% on the high figure of 2017.

Sector challenges

Other than the obvious fact that the UK’s economic atmosphere is in hot water, the automotive industry (including component manufacturers) has been struggling to stave off the high energy costs of doing business.

In a survey, 69% of respondents flagged energy costs as a key concern. Estimates suggest that the sector’s collective energy expenditure has gone up by 33% in the last 12 months reaching over £300 million, forcing several operations to become unviable.

Although the government enacted measures to cap the price of energy and ease obstacles to additional production, Mike Hawes, the CEO of SMMT, said,

This is a short-term fix, however, and to avoid a cliff-edge in six months’ time, it must be backed by a full package of measures that will sustain the sector.

Due to the meteoric rise in costs across the automotive supply chain, 13% of respondents were cutting shifts, 9% chose to downsize their workforce and 41% postponed further investments.

Bleak outlook

Uncertainties around Brexit and the EU trade deal are yet to be resolved.

Moreover, the energy crisis is poised to get even more acute unless Russia withdraws from the conflict, or international leaders ease restrictions on Moscow. Last week, I discussed the evolving energy crisis here

With global central banks expected to tighten till at least the end of the year, demand is likely to be squeezed further pressurizing British car manufacturers.

Electric vehicles made up 71% of car exports from the UK in August, but robust growth in the sector looks challenging in the near term, in the absence of widespread charging infrastructure, high electricity prices and globally low consumer confidence.

Although energy subsidies could provide some relief in the immediate future, the industry will remain in dire straits while investments stay low and the shortage in human capital persists, particularly amid the push for EVs.

Given the prevailing macroeconomic environment, and severe market backlash to Truss’s mini-budget (which I discussed in an earlier article), the sector is unlikely to turn the corner any time soon.

The post August data shows UK automotive sector heading for a “cliff-edge” in 2023 appeared first on Invezz.

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BRV China Holds Singapore Explorer Day at SMU

BRV China Holds Singapore Explorer Day at SMU
PR Newswire
SINGAPORE, Sept. 29, 2022

Brings Together Leading Entrepreneurial Minds Across China, Southeast Asia, North America
SINGAPORE, Sept. 29, 2022 /PRNewswire/ — BlueRun Ventures China (BRV Chin…

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BRV China Holds Singapore Explorer Day at SMU

PR Newswire

Brings Together Leading Entrepreneurial Minds Across China, Southeast Asia, North America

SINGAPORE, Sept. 29, 2022 /PRNewswire/ -- BlueRun Ventures China (BRV China), a leading early-stage technology-focused venture firm, yesterday hosted Explorer Day in Singapore in collaboration with the Institute of Innovation & Entrepreneurship of Singapore Management University and SGInnovate, a government-owned innovation platform in Singapore to support deep technology entrepreneurship. The event brought together more than 80 founders and pioneers – local entrepreneurs, government associations, academics and venture capitalists – who discussed the company's global investment strategy and emerging trends in the fields of artificial intelligence (AI), enterprise services, Web3, robotics and the global expansion plans of start-ups.

BRV China sees significant opportunity for technology investment globally and shared the following insights during the event:

  • Despite market volatility, BRV China remains confident in the fundamental value of many portfolio companies as high-quality start-ups capable of developing disruptive innovations have continued to demonstrate an ability to secure third-party capital.
  • BRV China remains bullish on the long-term prospects of key frontier areas such as AI, robotics, new energy solutions and biotechnology (powered by innovative algorithms).
  • Unlike internet services like mobile apps and e-commerce services that are specifically designed for a geographical region, deep technologies possess substantial business development potential with increasing demand in the global market that will lead to an expected rise in demand for deep technology talent.
  • BRV China believes there's significant long-term potential in the global market with investment flows into the region expected to bounce back following global economic recovery in the coming years.
  • With great changes unseen in a generation will come greater opportunities. Venture capitalists, entrepreneurs and startups were called on to re-evaluate the economic cycle and establish long-term plans so they are ready to "surf the wave" upon eventual recovery in the near-term.

Having first-mover advantages in deep technology and a strong track record across market cycles, BRV China shared its experiences on the opportunities and challenges faced by early-stage startups in areas such as accessing financing solutions and commercialization of technologies ultimately helping promising companies be fully prepared for the many hurdles they face on their growth journey.

"We continue to witness a rapid transition towards a digitalized economy that was accelerated by the pandemic leading to a gamut of opportunities for start-ups that continues to contribute to the growth of the technology sector," said Jui Tan, Managing Partner of BRV China. "To help Chinese start-ups survive a crisis of such unprecedented magnitude, BRV China has been providing continuous support helping many companies adapt and reconfigure their business models while speeding up their R&D and commercialization processes."

The event also featured guest speakers from startups such as Gaussian Robotics and HPC-AI, two fast growing portfolio companies, who shared their journey to success.

"China has leading competitive advantages in deep technologies such as robotics, new energy, AI infrastructure and applications, consumer technology and semiconductors which are in hot demand across the world," said Terry Zhu, Managing Partner at BRV China. "To go global, it is necessary for startups and entrepreneurs to leverage the country's competitive edge and weigh between political influence from different markets while formulating their plan of development. BRV China will help China start-ups to achieve their goal, seizing development opportunities as they arise due to the digital transformation of supply chains, growth in market size and globally distributed Chinese talents."

"Singapore has a flourishing ecosystem as it has a fertile ground for start-ups which are supported by a forward-looking government, a strong research base and a skilled talent pool. BRV China will leverage its experience and help connect researchers, entrepreneurs and investors in order to build a robust ecosystem for innovation," said Jui Tan.

About BRV China

BlueRun Ventures China (BRV China) is a leading early-stage venture firm in China with offices in Beijing and Shanghai. Having its heritage in Silicon Valley since 1998 and entered China in 2005, BRV China has managed over $2 billion through multiple USD and RMB funds, with over $1 billion cash distributions. BRV China focuses on investing in entrepreneurs who create a sustainable impact through technological innovations across enterprise services, transportation and smart machine, digital healthcare, and consumer technology sectors in China. The firm has invested in more than 150 portfolio companies, including Li Auto (NASDAQ: LI), QingCloud (688316.SH), WaterDrop (NYSE: WDH), Energy Monster (NASDAQ: EM), Mogujie/Meilishuo (NYSE: MOGU), Qudian (NYSE: QD), Ganji/58.com, PPTV, Guazi, Meishubao, Nanyan, Shanzhen, Gaussian Robotics, Yi Auto, Pinecone, etc. The firm has been recognized as the "No.1 Early-Stage Investment Firm" in China by Zero2IPO and ChinaVenture, and "Consistent Performing Venture Capital Fund Manager" by Preqin. For further information, please visit https://www.brv.com.cn/en/.

View original content to download multimedia:https://www.prnewswire.com/news-releases/brv-china-holds-singapore-explorer-day-at-smu-301636758.html

SOURCE BRV China

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