Founder of Antler Capital

Stanley Tsai, CFA

Macroeconomics

The divergence between China's May PPI and CPI was materially wider than expected. At 7.7%, the gap has reached a new high. Cost pressures on mid/downstream producers are mounting, although in our view, a good portion of that risk has been priced into equity valuations. Consumer prices will likely remain benign for the rest of the year, owing to subdued food prices and Beijing's tight grip on the supply chain (Exhibit 1).
The sharp bounce in PPI is reminiscent of what we saw in 2010 and 2017. But the external environment is vastly different from both monetary and geopolitical perspectives. In any case, we believe we are close to the peak in the cycle, if we are not already there.
Headline CPI was benign, putting concerns over tightening to rest for the time being. To be clear, inflation will gradually trickle down to the consumer, but the pace appears to be steady. At the current rate, we see CPI ending the year at the 2% level. We believe this scenario is supportive of a rotation into consumer cyclicals.
Overall, the new trade and inflation data reinforce our view that monetary policy will stay the course in 2H21. But we will probably see moderately tighter lending conditions through the summer and autumn. Slower credit growth may also weigh on construction activity, curbing further commodity rallies. 
With consumer prices in check, policymakers will remain focused on frothy property values. The key policy risk continues to shift to the long end of the lending curve, with marginal upward strain on the five-year loan prime rate on which mortgage pricing is based.
<table class="table table-striped">
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<td style="width: 100%;">Exhibit 1: China | CPI &amp; PPI % Change y/y</td>
</tr>
<tr>
<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/212/158/original/image_705612152181623231380328.png?1623231381" class="editor-image img-responsive" data-smartkarma-image-id="212158"></figure>
Source: National Bureau of Statistics
</td>
</tr>
</tbody>
</table>

The divergence between China's May PPI and CPI was materially wider than expected. At 7.7%, the gap has reached a new high. Cost pressures on mid/downstream producers are mounting, although in our view, a good portion of that risk has been priced into equity valuations. Consumer prices will likely remain benign for the rest of the year, owing to subdued food prices and Beijing's tight grip on the supply chain (Exhibit 1).
The sharp bounce in PPI is reminiscent of what we saw in 2010 and 2017. But the external environment is vastly different from both monetary and geopolitical perspectives. In any case, we believe we are close to the peak in the cycle, if we are not already there.
Headline CPI was benign, putting concerns over tightening to rest for the time being. To be clear, inflation will gradually trickle down to the consumer, but the pace appears to be steady. At the current rate, we see CPI ending the year at the 2% level. We believe this scenario is supportive of a rotation into consumer cyclicals.
Overall, the new trade and inflation data reinforce our view that monetary policy will stay the course in 2H21. But we will probably see moderately tighter lending conditions through the summer and autumn. Slower credit growth may also weigh on construction activity, curbing further commodity rallies. 
With consumer prices in check, policymakers will remain focused on frothy property values. The key policy risk continues to shift to the long end of the lending curve, with marginal upward strain on the five-year loan prime rate on which mortgage pricing is based.



Exhibit 1: China | CPI &amp; PPI % Change y/y




Source: National Bureau of Statistics





China Macro: PPI Peaks, While CPI Eases Tightening Fears

May export data were considerably weaker than expected, but in our view, it's still much too early to call an inflection point.
Exports surprised on the downside. In dollar terms, exports were up 27.9% y/y, shy of the 30+% level the market expected.  The weakness came primarily from textile, home electronics and medical equipment. Even if we exclude the impact of higher demand for pandemic-related goods in May 2020, the numbers still look weak across the board, with momentum retreating amongst China's major trading partners.
On the other hand, imports remained robust. Imports were up 51.1% y/y, ahead of expectations. Inflation, transitory or not, continued to drive import prices higher. Unsurprisingly, fuels, metals and soy were the key components of the story here.
China's trade surplus rose to USD45.5bn, an increase of 5.2% y/y or 6.3% m/m, after adjusting for the 2020 anomalies. Meanwhile, the country's FX reserve reached a recent high of USD3.22tn, up 3.9% y/y or 0.7% m/m, thanks to the weak USD. We see USD/CNY testing the 6.3 level in the coming months.
Looking ahead, we see reasons to remain optimistic about export growth in the next few quarters, but the mix will likely change. Despite the worrying situations in India, Singapore and Taiwan, retail activity has picked up noticeably in many parts of the world. Google Mobility provides a useful alternative dataset to gauge the reopening progress. In our opinion, these figures point to continued support for mid/downstream sectors (Exhibit 1).
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 726.047px;">Exhibit 1: % Change in Visits to Retail &amp; Recreational Spots | Trends</td>
</tr>
<tr>
<td style="width: 726.047px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/211/860/original/image_26179632271623124889068.png?1623124890" class="editor-image img-responsive" data-smartkarma-image-id="211860"></figure>
Source: Google; Our analysis
</td>
</tr>
</tbody>
</table>

May export data were considerably weaker than expected, but in our view, it's still much too early to call an inflection point.
Exports surprised on the downside. In dollar terms, exports were up 27.9% y/y, shy of the 30+% level the market expected.  The weakness came primarily from textile, home electronics and medical equipment. Even if we exclude the impact of higher demand for pandemic-related goods in May 2020, the numbers still look weak across the board, with momentum retreating amongst China's major trading partners.
On the other hand, imports remained robust. Imports were up 51.1% y/y, ahead of expectations. Inflation, transitory or not, continued to drive import prices higher. Unsurprisingly, fuels, metals and soy were the key components of the story here.
China's trade surplus rose to USD45.5bn, an increase of 5.2% y/y or 6.3% m/m, after adjusting for the 2020 anomalies. Meanwhile, the country's FX reserve reached a recent high of USD3.22tn, up 3.9% y/y or 0.7% m/m, thanks to the weak USD. We see USD/CNY testing the 6.3 level in the coming months.
Looking ahead, we see reasons to remain optimistic about export growth in the next few quarters, but the mix will likely change. Despite the worrying situations in India, Singapore and Taiwan, retail activity has picked up noticeably in many parts of the world. Google Mobility provides a useful alternative dataset to gauge the reopening progress. In our opinion, these figures point to continued support for mid/downstream sectors (Exhibit 1).



Exhibit 1: % Change in Visits to Retail &amp; Recreational Spots | Trends




Source: Google; Our analysis





China Macro: Exports Disappoint, but It's Still Early in the Game

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Shanghai Shenzhen CSI 300 Index / Technical Analysis

Global equities (MSCI ACWI, ACWI ex-US, and EAFE) remain bullish with their uptrends intact, and the MSCI Emerging Markets index continues to hold above major support at $52 on the EEM-US. Additionally, Europe’s STOXX 50 and Hong Kong’s Hang Seng are on the cusp of short-term breakouts, while the major indexes in China (Shanghai Composite &amp; CSI 300) are currently breaking above short-term resistance... see chart below. Considering the absence of breakdowns and the fact that market dynamics remain largely positive, our overall constructive outlook remains appropriate.

Global equities (MSCI ACWI, ACWI ex-US, and EAFE) remain bullish with their uptrends intact, and the MSCI Emerging Markets index continues to hold above major support at $52 on the EEM-US. Additionally, Europe’s STOXX 50 and Hong Kong’s Hang Seng are on the cusp of short-term breakouts, while the major indexes in China (Shanghai Composite &amp; CSI 300) are currently breaking above short-term resistance... see chart below. Considering the absence of breakdowns and the fact that market dynamics remain largely positive, our overall constructive outlook remains appropriate.

Chinese Indexes Headed Higher; Actionable Themes: Transportation, Materials, and Services

Our outlook remains unchanged as the weight of the evidence continues to suggest a mixed, but overall constructive market. Cyclical value Sectors continue to be our favorite areas to overweight (i.e., Energy, Materials, Manufacturing, and Transportation), while defensive Sectors also continue to be worth a look (i.e., Staples, Health Care, and Real Estate).

Our outlook remains unchanged as the weight of the evidence continues to suggest a mixed, but overall constructive market. Cyclical value Sectors continue to be our favorite areas to overweight (i.e., Energy, Materials, Manufacturing, and Transportation), while defensive Sectors also continue to be worth a look (i.e., Staples, Health Care, and Real Estate). 

Global Equity Strategy: Value Remains Leadership But Defensives Improving

Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

Cross Asset Strategy

As major indices around the world remain somewhat on the back foot at the start of this week, one market that has done the opposite is the Shanghai Composite.
Today we finally see a bullish break as the market rallies through 3,500.
While further near term gains in Shanghai are expected, and targets are highlighted, the long term chart against the S&amp;P 500 reveals a more interesting possibility...

As major indices around the world remain somewhat on the back foot at the start of this week, one market that has done the opposite is the Shanghai Composite.
Today we finally see a bullish break as the market rallies through 3,500.
While further near term gains in Shanghai are expected, and targets are highlighted, the long term chart against the S&amp;P 500 reveals a more interesting possibility...

China

The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was developed on December 19, 1990 with a base value of 100. 

Shanghai Stock Exchange Composite Index (SHCOMP INDEX)

Shanghai Stock Exchange Composite Index (SHCOMP INDEX)

China Macro: PPI Peaks, While CPI Eases Tightening Fears

In our view, China's PPI has likely peaked, while CPI will remain benign. The current trajectory suggests limited room for monetary maneuvers. And...

Stanley Tsai, CFA

China Macro: Exports Disappoint, but It's Still Early in the Game

May export data were considerably weaker than expected, but in our view, it's still much too early to call an inflection point.

Stanley Tsai, CFA

Chinese Indexes Headed Higher; Actionable Themes: Transportation, Materials, and Services

The evidence continues to suggest that value remains leadership and we recommend adding exposure to cyclical value on this minor pullback in the...

Vermilion Research

Global Equity Strategy: Value Remains Leadership But Defensives Improving

Cyclical value Sectors continue to be our favorite areas to overweight, while defensive Sectors also continue to be worth a look (i.e., Staples,...

Vermilion Research

China Equities: The Hidden Dragon

The short term bullish break on the Shanghai Composite is interesting...but not as interesting as where we are on the ratio against the S&P 500.

Shyam Devani