The US consumer and the FOMC meeting, and picking sectors in China
US economic data this week has been mixed, on the one hand there was the weaker than expected inflation print for August, which tempered some of the enthusiasm for a Fed taper announcement next week. Then there was the US retail sales report on Thursday, which was much stronger than expected. US retail sales rose 0.8%, the market was expecting a 0.7% decline. Considering there was lots of pessimism baked in to markets about the state of the US consumer and the US economy more generally after a summer where the Delta covid variant ravaged parts of the US, the retail sales data for August has shifted the debate once again. Will the persistent strength of the US consumer be enough to trigger a taper announcement from the Fed, and will the Fed shift to a less dovish stance as a result of this week’s data? If we see a sharp rise in US consumer confidence on Friday then it could be game, set and match for a taper announcement from the Fed next week.
Consumer strength from the safety of the home
The US retail sales data is worth looking at closely. It was undoubtedly boosted by back-to-school spending and also child tax payments from the government. This helped to boost core retail sales, excluding autos, which rose by 2.5%. The rise of the Delta variant in the US was visible in the data, for example, eating in restaurants and bar spend was flat for the month, while online sales surged more than 5% last month as more people shopped from the comfort and safety of their own homes. The strength of the US consumer is impressive, compared with last year, retail sales are up 15.1%. Manufacturing activity in the US is also booming, with the Philadelphia Fed index rising 11 points to 30.7, well ahead of estimates that were looking for a figure of 18.7.
Peak growth may not be a relic of the past
The stronger retail sales data is challenging the theory that the US economy reached peak growth earlier this year and is set for a decline in Q3, the latest US retail sales data could keep Q3 GDP fairly buoyant. Now that the spotlight is on the consumer as the chief engine of US growth, then the focus needs to shift to what the Christmas story will look like. Demand for consumer goods is strong and supply chains are very tight. This is pushing prices up and it is the simplest reason why inflation is rising across the Western world. With the Christmas shopping season getting closer, manufacturers are running into a tight deadline to get goods out of China and into the US and Europe in time for holiday season. The rising cost of shipping containers and logistics means that this is not an easy journey, and as we lead up to Christmas, some goods will make it out of China, and some won’t. This will likely lead to pockets of extreme price pressures for certain goods. Over the next few weeks, it is worth keeping an eye on any consumer goods companies with persistent supply chain problems, as these companies could see a disastrous holiday shopping season and weak earnings for Q3/Q4. Interestingly, in the UK John Lewis has chartered its own ships to ensure that goods arrive in the UK in time for the holiday shopping splurge. If that pays off, then John Lewis could be a big winner later this year.
Chinese sectors safe from Beijing’s glare
Elsewhere, in contrast to the consumer largesse in the US, the Chinese consumer is reigning in spending. Chinese retail sales rose by 2.5% in August, the market had been expecting a 7% rise. Industrial production was also weaker, house prices fell, and Fixed Asset Investment was also down a touch. The weaker than expected retail sales in China could be down to two things: 1, the impact of the Delta variant in China was worse than expected and 2, the recent government crackdown on multiple sectors of the economy, including gaming, technology and education could have rattled Chinese consumer confidence, where it is no longer politically expedient to spend money on flashy designer items. There has not been too much analysis on the impact of the Chinese government’s interventions in the economy on its growth prospects, but we remain wary of China. For those who are looking to get exposure to China, we would urge caution. However, we still think that there are some sectors of the Chinese economy more sheltered from government intervention than others. These include companies that are exposed to Beijing’s long term industrial policy, it also helps if they keep a low profile. Chinese firms that specialise in renewable energy and electric vehicle makers could still see plenty of upside in the coming months and years and their political risk premiums are lower than other Chinese stocks such as tech stocks. Renewable energy stocks to watch include JinkoSolar, which is down some 25% so far this year but it is currently looking like good value when valuations for other stocks remain high. In the EV space, local makers include Nio and Xpeng have both doubled in the last year, which highlights confidence in this sector. Overall, financial, technology and education stocks are off limits in the current environment, but some industrial sectors remain attractive in the long term.
The winners from the energy price crunch
Returning to the consumer, commodity prices have surged this week, although prices moderated somewhat on Thursday. Natural gas prices, which are a key component of Europe’s energy mix, are at a 12-year high, and it could be a long, cold and expensive winter for European consumers to weather. The energy price crunch is likely to take a serious bite out of consumers’ firepower this holiday season. At the same time as gas prices are at multi year highs, North Sea wind farms have experienced their lowest wind levels in 20 years. If commodity prices remain strong then there is a high chance of pass-through risk to the consumer, which could hurt Christmas holiday sales. Thus, the mix of rising energy prices, supply chain issues and the end of income support schemes linked to Covid, and the economic picture for the West remains unclear. Combined with weakness in China, there is a risk that global growth could still come under pressure. Thus, the Federal Reserve will need to think long and hard about when and how to taper without making a policy mistake when they meet next week.
There will be winners from the energy price crunch, and these include BP, Shell and Total, these companies are major European natural gas producers, and if we continue to see elevated gas prices then these energy stocks could rise. On the currency front, the Norwegian krone remains sensitive to shifts in energy prices, and we think that USD/NOK could be in for some further weakness, after falling 0.6% on Thursday. NOK 0.1150 and then NOK 0.1090, the low from August, are two short term support zones.