Inflation pressure ease off in July. US stock market rallies on news

The pace of price rises dipped in the US in July as gas prices eased, bringing down the annual rate of inflation to 8.5%, still close to a multi-decade high but lower than the four-decade peak it hit in June. July’s figure, while still high, represents a significant fall from the annual rate of 9.1% recorded in June and will raise hopes that inflation has finally peaked in the US. It follows other indicators that have suggested price rises are moderating.

The dip in inflation will be a boon to the Biden administration which this week passed the $739bn Inflation Reduction Act in the Senate. The bill aims to tackle the climate crisis while lowering healthcare costs and raising taxes on large corporations.

The US Job market continues it strong streak adding 528,000 new jobs in July as compared to the 300k+ expected by analysts.

The US stock market rallied strongly as a result of the news. While it is hopeful that inflation pressure will start to come down in the future, the current inflation is still high by historical standards and will continue to push interest rates up, but probably at a much slower pace, bringing stability to the market. This also ward off the risk of a deep stagflation recession.

China Economy Stumbles

The periodic COVID-19 lock down in China is starting to take a wider toll on the overall economy. 

China on 15th Aug, announced surprise interest rate cuts in a bid to boost its struggling economy as industrial production and retail sales weakened while youth unemployment hit a record high.

The world's No. 2 economy has yet to gain a solid footing and narrowly avoided a second-quarter contraction, as repeated lockdowns under China's strict zero-COVID policy weigh on activity with factory output and consumer spending struggling to mount a strong recovery.

The China central bank last cut these rates in January and had appeared reluctant to lower policy rates further despite the economic blow from the Omicron wave. However, the recent wave of bad data forced it to lower interest rate further to ease the economic slow down. However, lowering interest rates will also add additional pressure on the soaring agricultural and energy inflation caused both by a combination of logistic bottleneck, global shortage, and in the latest blow, a series of drought devastating agricultural production this year. 

Another concerning development is that China's real estate development contracted by 6.4%, while property sales in the first seven months of the year tumbled 28.8%, compared with 30.7% growth in the same period for 2021. China's struggling property market, which accounts for about a quarter of gross domestic product, is under pressure as thousands of homebuyers threaten to not pay their mortgages until debt-strapped developers complete their unfinished homes. The sector has been hammered by a wave of bond defaults among key companies, most notably China Evergrande, once the country's top property builder.

Portfolio Strategy

Thanks to the good news in US, the US stock market rallied strongly, while Emerging Market stock, dominated by the China economy, continue to suffer. The US stock market has rallied 6% while the China stock market is down 6% for the month. As long as China continued it's close door policy, it will be difficult to get its economy back on its feet and hence, I will continue to avoid putting any meaningful allocation into China until the Chinese government decides to start opening up. There will be no change in the investment strategy with most of our allocation into US.

As mentioned in my last newsletter, it is a good time to invest during this period of time and base on the current valuation, the market is still good to enter, though I will expect some volatility after the recent relief rally.