(MarketWatch) - Many investors are betting on an inflation peak. Here’s why a former hedge-fund manager says they’re wrong.
Our call of the day, which says it's time to short long bonds because of sticky food inflation --- thanks to China.
“This is a sudden powerful new distraction for markets when this week was supposed to be about incoming U.S. data,” sum up strategists at Saxo Bank. They say watch companies exposed to China, “given forward earnings are likely to be downgraded following further China lockdowns and protests.”
Before China grabbed the spotlight, holiday weekend sales, jobs and inflation data that due this week, as well as remarks by Fed Chairman Jerome Powell were the big focus.
Other questions are now swirling. Will China-related falls in oil prices lend to the peak inflation theory? And what about China’s post-COVID economic rebirth?
Onto our call of the day, which says it’s time to short long bonds because of sticky food inflation — thanks to China. It comes from Russell Clark, a former hedge-fund manager who has spent the last 20 years focusing on that market, macro and short selling.
He notes investors have been scooping up the the iShares 20 years+ Treasury Bond ETF TLT, +0.28%, a liquid exchange-traded fund that buys long-dated bonds, even as with U.S. inflation hovering at 1970 highs.
“The reason that people are getting bullish bonds I believe is that the yield curve has inverted. And every time that has happened, you have a recession and you want to get out of equities and into bonds,” says Clark. A yield curve inversion occurs when long-term interest rates drop below short term rates. The inversion of 2 and 10-year Treasury yields is at its steepest since the 1980s.
Clues may lie in Japan’s poorly performing bond market. “Not only has it been prescient in leading the U.S. bond yields lower from 1999 onward, in 2020 the JGB market was also prescient in signaling the future U.S. treasury sell off,” he says.
And what Japan is likely seeing that U.S. investors aren’t right now is China-driven food inflation. That’s something the Fed will find it tough to ignore, he said.
Since the since the 1980s, food commodity prices have followed raw commodity prices higher, If the Fed wants to work that down, it will raise interest rates. For example, falling natural-gas prices NG00, +0.03% would help ease fertilizer costs for farmers.
“The reason that people are getting bullish bonds I believe is that the yield curve has inverted. And every time that has happened, you have a recession and you want to get out of equities and into bonds,” says Clark. A yield curve inversion occurs when long-term interest rates drop below short term rates. The inversion of 2 and 10-year Treasury yields is at its steepest since the 1980s.
Clues may lie in Japan’s poorly performing bond market. “Not only has it been prescient in leading the U.S. bond yields lower from 1999 onward, in 2020 the JGB market was also prescient in signaling the future U.S. treasury sell off,” he says.
And what Japan is likely seeing that U.S. investors aren’t right now is China-driven food inflation. That’s something the Fed will find it tough to ignore, he said.
Since the since the 1980s, food commodity prices have followed raw commodity prices higher, If the Fed wants to work that down, it will raise interest rates. For example, falling natural-gas prices NG00, +0.03% would help ease fertilizer costs for farmers.
Clark points out that China is the world’s biggest food importer, with much higher prices than the U.S.
“Pork, which is the most consumed meat in China, is now 3 times more expensive than the U.S. market, and has recently doubled in price. As Japan is also a large importer of pork, perhaps this was the reason the JGB market sold off before the U.S.,” he said.
Beef is also a major import for China, and yes, prices are much higher than that of the U.S.
“In essence, I am saying that China is exporting food inflation to the rest of the world, and I don’t see that ending at the moment. JGBs seem to agree – and when I look at the index value of US Food CPI on a log basis, I keep thinking that is says interest rates are going higher not lower,” said Clark.
He sees food inflation looking secular, rather than cyclical, due to the demands of an increasingly urbanized China. “Secular food inflation implies POLITICAL pressure to have higher interest rates. US treasuries look a short to me, just as everyone has gotten long,” he said.
The markets
Stocks DJIA, -1.45% SPX, -1.54% COMP, -1.58% are falling, alongside Treasury yields TMUBMUSD10Y, 3.684% TMUBMUSD02Y, 4.442% and oil CL.1, +0.34% also are falling. The Japanese yen USDJPY, -0.03% is seeing some safe-haven bids. The Hong Kong Hang Seng Index HSI, -1.57% closed down 1.5%.
For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.
The buzz
China slightly eased some COVID-19 restrictions after protests spread across major cities following a deadly apartment-building fire in a locked-down city. A BBC reporter was arrested and beaten. Meanwhile, lockdowns mean China farmers are destroying crops they can’t sell.
And similar unrest at China’s Zhengzhou Foxconn 2317, -0.50% factory is expected to cause a shortfall of 6 million Apple AAPL, -2.63% iPhone Pros this year. Apple shares are lower.
Pinduoduo shares PDD, +12.62% are soaring after the China-based mobile marketplace reported profit and revenue beats.
MGM Resorts MGM, -2.27%, Las Vegas Sands LVS, +1.11% and Wynn Resorts WYNN, +4.36% are higher after Macao tentatively renewed their casino licenses.
Black Friday online sales topped a record $9 billion, as some wonder if Cyber Monday is still a thing.
St. Louis Fed President James Bullard will sit down for an interview with MarketWatch on Monday, at 12 noon Eastern. New York Fed President John Williams address the Economic Club of New York at the same time. Fed’s Powell will speak on Wednesday, along with several other Fed officials this week.
A busy data week starts Tuesday with home-price indexes and consumer confidence data. GDP, the PCE price index for October — a favored gauge of the Federal Reserve and November employment data are also on tap this week.
Best of the web
‘I believe the economy is the biggest bubble in world history,’ warns ‘Rich Dad, Poor Dad’s Robert Kiyosaki.
Iran was calling for the U.S. to be expelled from the Qatar World Cup.
Lab study shows next COVID strain will be more deadly.
November 28, 2022
