Weekly Market Recap

China’s peaking

26/04/2021

Week in review

Australian retail sales 1.4% m/m
RBA policy minutes hold the lower for longer line
Eurozone PMI Composite slightly improved to 53.7

Week ahead

Australia CPI inflation 1Q
Eurozone and U.S. first quarter GDP
U.S. Federal Reserve policy meeting

Thought of the week

Investors looking to hedge the upside risk from inflation may turn towards commodities and the historically inverse relationship to the rate of inflation. However, the strength in some commodity prices is being questioned, especially as China starts to ease back on the supply of credit to the recovering economy. The credit impulse is the amount of credit being pumped into an economy as a share of GDP. In the case of China there is a pretty strong relationship between this pulse and the price of industrial metals (see chart). The logic being that Chinese stimulus funds infrastructure projects that require steel (and therefore iron ore) and copper creating demand and driving prices higher. The credit impulse in China has potentially peaked and if this proves to be a reliable lead indicator of metal prices, suggests that metal prices may face a headwind. The offsetting factor is how demand will be created as the global economy outside of China recovers.

A peaking in China’s credit impulse

China credit impulse and industrial metal prices

Source: Bloomberg, FactSet, J.P. Morgan Asset Management. Data reflect most recently available as of 23/04/21.
All returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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