Conclusion: We continue to see supportive data points that growth is slowing and inflation is accelerating on a GLOBAL basis in 1H11.
While we may have been early, our view that global inflation would lead to tighter monetary policy and slower global growth is beginning to play out in spades. In aggregate, global inflation is being driven by the Fed’s experiment with Quantitative Guessing. Numerous “insignificant” countries ranging from China, to Brazil, to India have explicitly pointed to monetary easing in the U.S. as a key contributor to their own inflation headwinds, as the weak U.S. dollar from July to November drove up commodity prices and accelerating inflation expectations carried them higher alongside the marginally stronger dollar of the last two months. We suggest you avoid buying the one-factor model of “accelerating US growth” as the reason global bond yields have ticked up over the last two month.
Now, we’re entering a period in which many countries will actually have to accelerate tightening measures, which may put additional upward pressure on US Treasury yields, as well as put downward pressure on global growth (email us for recent reports pertaining to the topic). We’d be remiss to forget how good 4Q09 and 1Q10 were from a global growth perspective. Those be some tough comps in the face of accelerating inflation, tighter monetary policy and higher interest rates.
Seemingly every day, we get a global macro data point(s) that fit into each of the three buckets of the equation. From today’s run we wanted to highlight the following:
Accelerating Inflation: Brazil CPI accelerated to a 25-month high of +5.91% YoY in December.
Monetary Policy Tightening: Indian Finance Ministry’s Chief Economic Adviser, Kaushik Basu, said India’s inflation rate is “too high” and needs to be addressed.
Slowing Growth: China’s Vice Premier Li Keqiang estimated that the Chinese economy grew about ~10% in 2010. Assuming he knows the numbers ahead of time, using his full year estimate, we can back into China’s GDP growth rate from 4Q10: +8.2% YoY. For reference, the Bloomberg consensus estimate for Chinese growth is +9% YoY in 4Q10 and +8.4% YoY in 1Q11. In a report yesterday, we explored the possibility of a hard(er) landing in China relative to consensus expectations, with the conclusion being that it is likely not priced into global equity markets (email us if you need a copy).
All told, the direction of global bond yields tells us one thing: inflation is a problem GLOBALLY. And because of that, there will be unintended consequences as struggling PIIGS and State & Municipal bond issuers come to the market to refinance throughout the year:
- According to some estimates, Italy and Spain (two of our favorite global macro shorts since 2Q10) need to raise €317B ($412B) this year – a sum equivalent to roughly 13.3% of their combined GDPs; and
- House Budget Committee Chairman Paul Ryan (R. WI) yesterday ruled out bailing out any US State in budget trouble. This explicitly translates to a higher risk premium for muni bond issuers as they accelerate tax-free muni bond issuance in the face of waning federal support to patch budget gaps totaling $140B starting in FY12 (which begins on July 1 for all but four states).
Of course, none of this matters to AAPL’s earnings…
The US equity market has been cruising along for the most part, but all is not well under the hood. Have a great weekend,