Long live the consumer – invest.ch

At Muzinich, we believe it is extremely important to monitor how the global consumer is responding to this extraordinary period of policy adjustments, rising costs of living and geopolitical tensions.

This week began with the release of the FOMC minutes, and it’s fair to say that while financial conditions have tightened since the June meeting, the board’s message confirms that a 75 basis point hike in July is the best option. The ECB, by comparison, appears to be sticking to a strategy of 25 basis points a month, out of respect for the impact of gas supply issues on inflation and growth. This has led to a flattening of the US Treasury yield curve, with the 2-year yield now higher than the 10-year. US interest rates are expected to be in terminal rates by the end of the year, followed by two cuts of 25 basis points each in 2023. US risk assets appear to be pricing in this development. The US was the week’s best performing high-yielding credit asset class and the only credit asset class to receive inflows1, with US stocks also outperforming. In contrast, the German government curve steepened and output yields fell during the week as investors continued to fear that if the ECB stayed on the sidelines, it could add to inflationary pressures. The big gainer from this divergent policy was the US dollar, which continues to appreciate against the euro. It’s up more than 10% year-to-date and up more than 2% this week. We believe that a stronger dollar will help tighten monetary policy and ease inflationary pressures imported into the United States, but will have the opposite effect on eurozone economies.

On the contrary, China continued to promote its growth policy. This week, Premier Li Keqiang urged local government officials in five coastal regions to introduce more growth-promoting measures, and China’s finance ministry plans to allow local governments to sell 1.5 trillion yuan ($220 billion) in special bonds in the second half of this year , an unprecedented acceleration of infrastructure financing for the economy.

At Muzinich, we believe it is extremely important to monitor how the global consumer is responding to this extraordinary period of policy adjustments, rising costs of living and geopolitical tensions. As a bottom-up credit manager, we believe we are well positioned to respond to what we see. First, the demand for electronic goods? The world’s largest chipmaker Taiwan Semiconductor Manufacturing Co this week reported second-quarter revenue of NT$534.1 billion, beating estimates of NT$519 billion, while Samsung Electronics reported revenue that beat 21% evaluations On the consumer staples side, Costco reported sales for June that were up 20.4% in June, reflecting growth in both traffic and the average amount spent compared to a year earlier. Finally, the Chinese consumer buys real estate; cumulative sales in the 36 major cities are up 78% year-over-year and now stand at just -9.1% year-over-year (see weekly chart).

The macroeconomic scenario remains bearish, but there was no new macroeconomic information to fuel the bearish fire this week. While investors have begun to look for more attractive valuations, microeconomic consumer data does not support macro fears.

2022.07.13.36 city
Weekly schedule – real estate sales in China are normalizing
Source: China Real Estate Index System (CREIS), Citi Research, as of July 8, 2022. For illustration purposes only.

It is about 36 cities:

  • 4 tier 1 cities: Beijing, Shanghai, Shenzhen, Guangzhou
  • 15 Tier 2 cities: Chongqing, Hangzhou, Nanjing, Wuhan, Chengdu, Suzhou, Dalian, Xi’an, Changsha, Fuzhou, Shenyang, Qingdao, Jinan, Changchun, Nanning
  • 17 Tier 3/4 cities: Wenzhou, Dongguan, Zhenjiang, Yangzhou, Lianyungang, Shantou, Jilin, Shaoguan, Zhoushan, Tai’an, Jianyin, Huaian, Wuhu, Shaoxing, Zhaoqing, Suzhou (Anhui), Haimen