The Cut
Height Capital’s Weekly Update

The last week was all about Global inflation rates, so we have dedicated this issue to unpacking those we consider most prominent:

Global inflation rates

• We saw most major economies report inflationary figures. Inflation is receding over most economies, but is still above the long-term average. The US reached 4.0%, which is falling and led to the US Federal Reserve leaving rates on hold for the current time. Later this week we will get better guidance on the Fed’s intensions, as a number of members of the board will speak. The UK and Euro Zone are still seeing significant inflationary issues, which have been driven by energy pricing. The area of concern has been the China market and lack of inflation and growth in the economy. As outlined in a previous edition of “The Cut” we don’t think stimulus will be far away, but it won’t be what we have seen throughout the 2010 decade due to a change in conditions. Our view is that global inflation will hold slightly above the long-term trend which will require governments to take future measures which are not factored into the market.

• The Bank of Japan (BOJ) surprised markets last week by maintaining its ultra-easy monetary policy settings. This is despite inflation proving stronger than expected and places the Central Bank in a very different stance to other major Central Banks around the world. The Bank flagged that whilst inflation has exceeded their 2% target for 13 straight months, they are concerned that by returning their settings to a more normal position, inflation will fall below their target. Currently, the BOJ’s short-term interest rate target is -0.1%, they are also engaging in yield curve control with a 0% cap on the 10-year bond yield. Below is an illustration of the ultra-low rates policy and inflation, which illustrates the reason why Japan can afford to be supportive of its economy with low rates, as they have been close to or below zero inflation for most of the previous decade.

• The market’s hope that China takes steps for a more forceful stimulus are growing after the cabinet met on Friday to discuss measures to spur economic growth, but concerns remain whether they would be enough to revive a faltering economy. The People’s Bank of China cut its benchmark loan prime interest rates on Tuesday this week, following a similar reduction in medium-term policy loans last week. Morgan Stanley expects an imminent stimulus package, including the loosening of property buying restrictions in top tier cities, more infrastructure support and targeted consumption subsidies. “Given that 2Q GDP growth is tracking at 0%, a strong sequential growth re-acceleration will be needed for full-year GDP growth to reach the government target of around 5%” said chief China economist Robin Xing.

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