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    1. Weekly Market Recap

    Weekly Market Recap

    What does supply chain tightness mean for profit margins?

    24/01/2022

    Week in review

    • China GDP rose 4.0% y/y in 4Q 2021
    • China retail sales grew 1.7% y/y, FAI grew 4.9% y/y, industrial output grew 4.3% y/y
    • Eurozone HICP inflation rose 5.0% y/y

    Week ahead

    • FOMC meeting
    • U.S. 4Q 2021 GDP, PCE, PMI
    • Eurozone PMI

    Thought of the week

    Supply chain tightness was a topic of concern during 3Q21 earnings as companies worried about how stretched supply chains could erode profit margins by pushing up costs. At a closer look, profit margins have remained resilient, and we continue to see reason for margins to remain healthy as we head into Q4 earnings. While supply chains remain tight, recent data suggests early signs of easing. Utilizing the difference between New Orders and Output (economic balance) as a proxy for demand and supply, recent numbers indicate that output has moved above new orders, signaling a normalization in supply and demand imbalances. The economic balance measure also showed a significant correlation with input price changes with a six-to-10-month lag. This means that input costs should moderate over time, easing the pressure on company bottom lines. In addition, companies have showed increased willingness to pass on cost to consumers in order to protect their margins* . As we head into Q4 earnings, how companies defended their profit margins will be a key feature to look out for. We estimate that the S&P500 will deliver a 32.4% y/y earnings growth in 4Q2021.

    Relationship between economic balance and input prices

    *Economic balance is the difference between New Orders PMI and Output PMI. A positive economic balance indicates a surplus in demand over supply, while a negative economic balance indicates surplus in supply over demand.

    Source: J.P. Morgan Markit Global PMI, J.P. Morgan Asset Management. Data reflect most recently available as of 21/01/22.
    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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    WEEKLY MARKET RECAP

    Weekly Market Recap 20220516

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    Weekly Market Recap 20220502

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    Weekly Market Recap 20220425

    Off target : Inflation pressures are building more slowly across Asia, and some central banks are responding, but the normalisation path will be relatively gradual.

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    Weekly Market Recap 20220411

    Tired of waiting for you : The RBA has signaled that higher rates are coming, but the market remains far ahead of what may be delivered.

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    Weekly Market Recap 20220404

    Dealing with distortion : Rising yields hide the very negative real yields underneath as the distortion in bond markets grows

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    Weekly Market Recap 20220328

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    Weekly Market Recap 20220321

    False start for recession : Flattening yield curves and falling sentiment gaps maybe signaling a false start to a recession.

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    Weekly Market Recap 20220307

    The impact of Russian default on global banking system should have limited effects on the global financial system.

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    Weekly Market Recap 20220228

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    Weekly Market Recap 20220221

    Under pressure: Core rates of inflation continue to rise in many developed markets, will central banks come out fighting with big rate hikes?

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    Weekly Market Recap 20220207

    The de-rating of equities in the face of tighter monetary policy is weighing on markets, but valuations should find a footing once this recalibration process is complete.

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    Weekly Market Recap 20220131

    Not as bad as you think.

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