Asia Market: Another Day, Another Record High

While base effects have started to lift both headline and CPI inflation in y-o-y terms – a process that the street thinks will continue over the next couple of months – headline CPI inflation climbed above 2.5% in March and could approach nearly 4% in May before slowing back in the second half of the year. Core CPI inflation could peak at around 2.5% in May then drop back during the late summer (this is extrapolated from UBS's Seth Carpenter, Chief US Economist, and HSBC US Economist Ryan Wang’s inflation outlooks).

Investors will need some proof in the earnings pudding to take the next leap of faith and confirm the lofty expectation, with S&P 500 earnings pegged to rise 25% in this quarter from a year ago. That would be the biggest quarterly gain since 2018 when tax cuts under former President Donald Trump boosted profit growth.

Major central banks may have formal independence, but the current Fed actions reflect the social and political backdrop in which they operate, enhancing their desire to fall behind that inflation curve. The Fed under Chair Powell's leadership has meant a remarkable dovish shift by focusing first and foremost on healing the labour market by recognizing the enormous redistributive power of a booming economy – one that generates both plentiful jobs and healthy wage growth, especially for low-income and minority groups. I'm not suggesting the market has turned passionate, but investors agree that now is not the time to exit from exceptional measures, given the enormous healing tasks ahead. 

China tightening is getting harder to ignore

However, not to rock the boat, it’s getting harder to ignore the tightening in China. Single-name credit concerns in China have had little to no contagion impact in recent years, so I don’t want to overstate the importance of the China Huarong story – it could be another one-off, and things roll on fine. On the other hand, there’s clearly a desire to tighten the screws on speculation and financial excess in China, and none of that is great for asset prices that are hitched to the China recovery train.

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