After months of rising inflation, the trend is broken at last, with US Consumer Price Index (CPI) recorded a 3.2% annual increase, down from September's 3.7% and significantly lower than the June 2022 pandemic-era peak of 9.1%. The decline in recent inflation is attributed to a 5% drop in gasoline prices, averaging $3.37 a gallon nationwide as of November 13. Despite the overall decrease, economists caution that underlying price pressures persist, with the core CPI, excluding volatile energy and food prices, falling to an annual rate of 4% in recent months. US real estate, a significant contributor to the core CPI, saw a decline in inflation to 6.7% year-over-year in recent months from a peak of over 8% in March 2023. The core Personal Consumption Expenditures (PCE) price index increased 0.2% in recent months, aligning with expectations, suggesting the Fed may consider holding rates steady or cutting them in 2024.
Earlier inflationary pressures were linked to supply chain disruptions and increased demand during the Covid-19 pandemic. As supply chains normalize and the labor market cools, these pressures gradually ease, with the Federal Reserve's measures, including raising interest rates, contributing to the moderation.
In the most recent meeting, the US Federal Reserve tabled the potential for 3 rate cuts in 2024 after holding on to the current interest rates for the last 3 session of Federal Reserve meetings. The US economy has slowed down more than expected and the potential rate cuts are expected to support the economy, preventing it from tipping into a recession.
The stock market has rallied in response to the tamed inflation rate, with the Dow Jones Industrial Average reaching a 2023 high. This positive market reaction further underscores the impact of inflation trends on investor sentiment and financial markets. In summary, the recent inflation report reflects a moderation in inflationary pressures, with certain categories experiencing increases, and the stock market responding positively to the overall economic scenario.
Deflation deepens in China
In November, China witnessed the most substantial drop in consumer prices over the past three years, accompanied by a deepening deflation at the factory gate. These developments underscore the escalating deflationary pressures, fueled by wavering domestic demand, which in turn casts uncertainty on the trajectory of the economic recovery.
Data released by the National Bureau of Statistics (NBS), the Consumer Price Index (CPI) plummeted by 0.5% both in comparison to the previous year and the preceding month. This decline surpassed the expectations outlined in a Reuters poll, which had predicted 0.1% decreases in both year-on-year and month-on-month comparisons. Notably, the year-on-year CPI decline marked the most significant drop since November 2020.
These figures contribute to the broader narrative shaped by recent trade data and manufacturing surveys, presenting a mixed picture and renewing calls for additional policy interventions to fortify economic growth.
Throughout the year, China's economic landscape has faced a series of challenges, encompassing escalating local government debt, a struggling housing market, and subdued demand both domestically and internationally. Notably, Chinese consumers have been exercising caution in their spending habits, displaying a heightened awareness of uncertainties surrounding the elusive economic recovery.
Portfolio Strategy
In November, the portfolio rallied strongly, encouraged by the tame inflation data, with Cash showing a gain of +5.29%, CPF up + 7.39% and SRS increasing by 4.47%.
The standout performer among sectors is the technology sector, witnessing a remarkable increase of 12-16% within just one month for tech funds. Anticipating imminent interest rate cuts, there is a clear indication that small companies and growth stocks relying on loans for business financing will attract considerable buying interest. This is driven by the expectation that such enterprises stand to enhance their potential profitability.
In light of the expected interest rate cuts, there's a strategic move on the horizon. Specifically, I am considering transitioning from our existing low-duration bonds to long-duration bonds, specifically the Franklin Templeton Western Asset Global Bond Trust A Acc SGD. This shift is geared towards capitalizing on the anticipated higher interest rates and positioning ourselves to benefit from any potential future rate cuts.
It is expected that the market should rally into the year end and we will have a double digit return for this bumpy year.
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