US Regional Banks Dramatically Step Up Loans to Oil and Gas

Economic

Commodity

Summary:

A group of US regional banks is ratcheting up lending to oil, gas and coal clients, grabbing market share as bigger European rivals back away.

The list of banks includes Citizens Financial Group Inc., BOK Financial Corp. and Truist Securities Inc., according to data compiled by Bloomberg. The companies have climbed between 13 and 40 steps up the league table for fossil-fuel lenders since the end of 2021, placing them among the world’s top 35 banks by number of deals. Fifth Third Securities Inc. and US Bancorp, already in the top 30, both ascended 10 steps in the same period.

Since the start of 2022, the combined number of fossil-fuel loans provided by Citizens Financial, BOK Financial, Truist Securities, Fifth Third and US Bancorp rose more than 70% on an average annualized basis, compared with the preceding six years, the Bloomberg data show.

Spokespeople for Truist, Fifth Third and US Bancorp declined to comment.

Rory Sheehan, a spokesperson for Citizens Financial, said the bank supports initiatives enabling the transition toward a lower-carbon future. He also said the bank recognizes the role of the oil and gas industry.

The development offers a glimpse of how the US banking landscape is being altered against a backdrop of stricter climate regulations across the Atlantic. US regional lenders — shaken by the crisis that followed Silicon Valley Bank’s meltdown — are participating in more fossil-fuel loans as banks in Europe begin to pull away for fear of getting caught on the wrong side of environmental, social and governance regulations and climate litigation.

“Someone betting heavily that the demand for fossil fuels will keep on rising significantly is clearly taking a view that is at odds with existing forecasts,” said Jean Boissinot, head of the secretariat for the Network for Greening the Financial System, which is hosted at the Banque de France and includes officials from the world’s central banks. “I would like to be very sure that they understand the implications of this kind of bet.”

BNP Paribas SA, the European Union’s biggest bank, and ING Groep NV, the largest lender in the Netherlands, are among banks that are in the process of expanding restrictions on fossil-fuel clients. The companies, which are both currently fighting lawsuits brought by climate nonprofits, dropped about 10 places in the ranking of oil, gas and coal lenders over the past two years.

Wall Street’s largest banks, meanwhile, remain among the absolute biggest lenders to the fossil-fuel industry. Last year, such loans were dominated by Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co., according to Bloomberg data.

Some of the US regional banks stepping up oil, gas and coal lending are based in states that have either passed or are reviewing anti-ESG laws. In Oklahoma, which enforced its Energy Discrimination Elimination Act in late 2022, local bank BOK Financial recently soared up the league table to become one of the world’s 30 busiest dealmakers in fossil fuels.

Marisol Salazar, senior vice president and manager for energy banking at BOK Financial, says the bank is now seeing “much more opportunities” in the fossil-fuel industry.

“We’re not just picking up customers,” she said. “We’re also picking up talent, we’re picking up engineers, we’re picking up investment bankers, we’re picking up experienced relationship managers.”

For fossil-fuel borrowers, the development means they can continue to gain access to credit at prices that remain competitive. It’s a development that challenges some assumptions around divestment policies, amid evidence that fossil-fuel companies are finding alternative sources of finance.

“For the smaller credits, there might be a little bit more aggressiveness in terms of pricing,” Salazar said. “But overall you’re going to see pretty common terms.”

From its base in Ohio, whose senate also has passed anti-ESG legislation, Fifth Third was recently among three banks that replaced Barclays Plc on a $325 million loan to ProFrac Holdings, a fracking company. That’s as the UK bank places curbs on high-carbon clients as part of its climate policy.

It’s not just smaller banks that are doing more fossil-fuel loans. Jason Kerr, a partner in the energy group at law firm White & Case, says he’s seeing commodities traders move in as some bigger banks pull back.

In Africa, where Kerr’s work is focused, the scale of the shift is “dramatic,” he said.

“Big international oil traders are going from fairly unsophisticated financing to quite complicated funding arrangements,” Kerr said. “They used to come into the market on a basic prepay for oil, but they’re increasingly becoming like conventional banks.”

There’s also evidence that banks are in some cases being replaced by private credit managers eager to get a foothold in fossil-fuel deals.

The value of private credit deals in the oil and gas industry topped $9 billion in the 24 months through 2023, up from $450 million arranged in the preceding two years, according to data provided by Preqin, an analytics company that tracks the alternative investment industry.

The upshot is that even if banks pull away from the fossil-fuel industry, “replacements come along and the financings continue,” Kerr said.

Source: Bloomberg

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Alex

Economic

Commodity

Stocks

Shares in Asia slipped to the lowest in six weeks, tracking Friday’s drop in US equities, as markets grappled with simmering tensions in the Middle East, disappointing bank earnings and the prospect of the Federal Reserve keeping interest rates higher for longer.

Equity benchmarks in Japan, South Korea and Australia all declined while Hong Kong stock futures also fell after the S&P 500 suffered its worst session since January on Friday amid a flight to safety.

But global markets showed signs of stability even after unprecedented attack on Israel at the weekend. Iran said “the matter can be deemed concluded,” and President Joe Biden reportedly told Israeli Prime Minister Benjamin Netanyahu that the US won’t support an Israeli counterattack against Iran.

Most Group-of-10 currencies strengthened against the greenback Monday while Treasures steadied in early Asian trading after yields slipped in the previous session. Gold rose amid driving demand for haven assets, while aluminum and nickel surged following new US and UK sanctions that banned deliveries of any Russian supplies after midnight on Friday.

“The muted market response likely stems from the highly intricate sentiment in the market at this stage: market participants are certainly not giving up hope that the past weekend’s events were just a one-off occurrence, while holding their breath for what could happen next,” said Hebe Chen, an analyst at IG Markets.

Asian Stocks Fall As Iran Attacks, Metals Rally_1

In Asia, Chinese equities are set for a tough week after a miss in the nation’s trade data Friday. Even if the global risk mood improves and Middle East tensions subside, Chinese stocks may see headwinds of their own to overcome. Authorities may hold a key interest rate and make liquidity abundant this week when a policy loan matures.

Elsewhere, developer China Vanke Co. said it’s making plans to resolve liquidity pressure and short-term operational difficulties as China’s top leaders have grown increasingly alarmed about the country’s protracted real estate crisis and its effect on the sluggish economy.

With investors already rattled by sticky inflation and the prospect of higher-for-longer interest rates, the escalation of the Middle East crisis may inject fresh volatility into markets. As the conflict widens, many say oil could surpass $100 a barrel and expect a flight to Treasuries, gold and the dollar, along with further stock-market losses.

Bitcoin rallied after it sank almost 9% in the wake of the attacks. Stock markets in Saudi Arabia and Qatar posted modest losses under thin trading volumes on Sunday. Israel’s equity benchmark fluctuated between gains and losses at least nine times before closing with a small gain.

Oil mostly shrugged off the attacks, with gains held in check by speculation that the conflict would remain contained. Brent crude is already up almost 20% this year and last traded around $90 a barrel. Asian Stocks Fall As Iran Attacks, Metals Rally_2

Asian Stocks Fall As Iran Attacks, Metals Rally_2

As Wall Street’s earnings season kicked off, big banks’ results offered the latest window into how the US economy is faring amid an interest-rate trajectory muddied by persistent inflation.

JPMorgan Chase & Co. and Wells Fargo & Co. both reported net interest income — the earnings they generate from lending — that missed estimates amid increasing funding costs. Citigroup Inc.’s profit topped analysts’ estimates as corporations tapped markets for financing and consumers leaned on credit cards — signs that a prolonged period of elevated interest rates will benefit big banks.

“Many economic indicators continue to be favorable. However, looking ahead, we remain alert to a number of significant uncertain forces,” JPMorgan’s Chief Executive Officer Jamie Dimon said. He cited the wars, growing geopolitical tensions, persistent inflationary pressures and the effects of quantitative tightening.

Traders will soon shift to looming economic data as they refine bets on central bank easing cycles, as well as the International Monetary Fund and World Bank spring meetings in Washington. This week, Chinese growth data and Japan, Eurozone and UK inflation readings are due.

Source：Bloomberg

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FOREX.com

Commodity

Forex

Market positioning from the COT report - as of Tuesday March 19, 2024:

Net-short exposure to yen futures rose to a 16-year high among large speculators.
Shorting the Swiss franc remained in favour, with large speculators increasing short exposure by +11% (+4.8k contracts) and reducing longs by -21.6% (-4.6k contracts).
Large speculators were net-short for a fourth week and by their most bearish amount in 18 weeks.
Whilst net-short exposure to AUD/USD futures fell for a third week by last Tuesday, I suspect many have returned since the latest batch of Middle East headlines.
Large speculators increased long gold exposure by 15.7% (+10.1k contracts) and reduced shorts by -7.1% (-8.4k contracts), whereas asset managers are on the cusp of flipping to net-long exposure for the first time in nearly five months.
Asset managers increased long exposure to VIX futures by 14.7% (+2.2k contracts).
Net-long exposure to Dow Jones futures fell to a YTD low among asset managers.

US Dollar, Yen, VIX, Gold, Crude Oil Analysis: COT Report_1

US dollar index positioning – COT report:

I noted the divergence between asset managers and large speculators regarding net exposure, and with the US dollar rising it seems that asset managers were on the right side of the move. The US dollar benefitted from hot CPI, Fed members pushing back on rate cuts and safe-haven flows from Middle East tensions.

Going forward, I now suspect large speculators will begin trimming shorts and adding to longs and flip to net-long exposure by the next COT report (assuming they haven’t already). My 106 target is now within easy reach, and a move to 108 seems feasible.

US Dollar, Yen, VIX, Gold, Crude Oil Analysis: COT Report_2

VIX futures positioning – COT report:

Middle East tensions weighed on Wall Street indices on Friday and sent the VIX briefly above 19 for the first day this year. The +2.3 point rise was its most bullish day since October, so it is interesting to note that asset managers and large speculators were trimming short exposure and adding to longs ahead of Friday’s move.

In fact, asset managers are on the cusp of flipping to net-long exposure to VIX futures for the first time since mid January. Yet just fur weeks ago, their net-short exposure was at the most bearish level since January 2020, just weeks ahead of the February 202 high all thanks to the pandemic.

I have conflicting thoughts over how to interpret this. Perhaps asset managers flipping to net-long exposure could indeed nail a market top and we finally see Wall Street indices correct by more than a few percent. Yet looking back through history, there have been many false signals when managers flip to net-long exposure, so perhaps we should wait for large speculators to also flip to net-long exposure before getting too excited over a larger drop for US indices.

US Dollar, Yen, VIX, Gold, Crude Oil Analysis: COT Report_3

JPY/USD (Japanese yen futures) positioning – COT report:

In July 2007 yen futures reached a record level of net-short exposure. And the recent break of key support which sent USD/JPY above 152 has seen net-short exposure break above the 2013 and 2017 cycle highs, and now within striking distance of the record high ~188 net short exposure. The break above 152 was significant, and there were even some clues from an MOF official that the need to intervene was not a strong as originally though. The next obvious level for traders to keep an eye on is 155 on spot USD/JPY prices, or 0.00646 on yen futures. Yes, yen futures could be at a sentiment extreme, but if there is no threat of intervention and US data continues to justify a stronger US dollar, then the path of least resistance for USD?JPY appears to be higher.

US Dollar, Yen, VIX, Gold, Crude Oil Analysis: COT Report_4

Gold futures (GC) positioning – COT report:

Gold futures rose for a fourth consecutive week and briefly traded above $2400 and formed a fresh record high. A bearish pinbar formed on the weekly chart to suggest bullish momentum is waning. But it is difficult to construct a particularly bearish case from this one candlestick alone. Large speculators and managed funds remain net long, but not by an extreme amount.

Asset managers decreased short exposure to gold by -9.4% (-7k contracts) and increased longs by 1.1% (+703 contracts), whereas large speculators increased long gold exposure by 15.7% (+10.1k contracts) and reduced shorts by -7.1% (-8.4k contracts).

And that means gold remains on the ‘buy the dip’ watchlist, even if dips may be shallow.

US Dollar, Yen, VIX, Gold, Crude Oil Analysis: COT Report_5

WTI crude oil (CL) positioning – COT report:

If you consider the headlines that were released from Friday and over the weekend regarding a potential Middle East conflict, crude oil’s reaction has been relatively subdued. IN fact, all of the action seemed to be on any market except crude oil, which sent US indices and commodity FX lower, gold and the VIX higher. It could be argued much of this has been priced in, given crude oil has risen ~30% since the December low.

Market positioning shows that large speculators and managed funds increased their net-long exposure for a second consecutive week. And like gold, exposure does not appear to be at a sentiment extreme. There was a slight increase of short bets among large speculators, but they may have since been removed given the headlines that were to follow after the COT data was compiled on Tuesday. And also like gold, WTI remains on the ‘buy the dip’ watchlist, as it is difficult to construct a convincing bearish case. Yet if oil is not rallying hard on Middle East headlines, it begs the question as to whether traders would be wise to indicate longs at these levels without waiting for a pullback first (unless tensions really do escalate).

US Dollar, Yen, VIX, Gold, Crude Oil Analysis: COT Report_6

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Samantha Luan

Economic

Stocks

India’s ability to turn its economic expansion into corporate profits makes it a better prospect for investors than Japan or China, according to the latest Bloomberg Markets Live Pulse survey.

The powerful rallies in Indian and Japanese equities as China’s market has slumped have reset Asia’s financial-market landscape, providing global investors with three competing poles for regional allocations.

Even with China’s attractively low stock valuations, and Japan’s progress in improving corporate governance, almost half of 390 MLIV Pulse survey respondents selected India as the best investment among the three Asian giants. The survey is a vote of confidence in India Inc. as the world's largest democracy is headed to general elections carried out over seven phases from April 19 until June 1. ‘Expensive’ India Lures Investors Avoiding China Risks_1

‘Expensive’ India Lures Investors Avoiding China Risks_1

“There are many reasons to prefer expensive India equities over cheap China ones such as better transmission of GDP growth into earnings growth,” said Kieran Calder, head of equity research for Asia at Union Bancaire Privee in Singapore. A “better track record of delivering consistent earnings growth and supportive geopolitical environment” further bolster the case for Indian shares, he said.

Key stock indexes in both India and Japan have climbed to records this year following a rally driven by rapid economic growth in the case of India, and the gradual return of inflation, along with corporate reforms in Japan. Indian equities now trade at around 23 times next year’s expected earnings, exceeding even the US, and outpacing the 17 for Japan and about nine for China, according to data compiled by Bloomberg based on MSCI Inc.’s indexes.

The main gauge of Chinese equities has tumbled about 40% from its peak set three years ago as deflation and a rolling property crisis have weighed on the economy. More than half of the survey respondents said they expected China’s equity market to underperform India and Japan’s over the next 12 months.

Indian equities attracted $25 billion in net inflows for the year through March, compared with just $5.3 billion for China, according to data compiled by Bloomberg. The tailwinds behind Indian shares include the growing population and optimism the growing middle class will feed into higher corporate profits.

“India is the best market to own,” said Vikas Pershad, portfolio manager at M&G Investments in Singapore. Indian equities are likely to play a large role in regional benchmarks, he said.

Indian shares now make up 18% of the MSCI Emerging Markets Index. China’s 25% weighting is well down from its high of more than 40% a few years ago.

Infrastructure in India was highlighted as a particular bright spot in the survey by 41% of the respondents. The government of Prime Minister Narendra Modi has more than tripled its infrastructure allocation from five years ago to more than 11 trillion rupees ($132 billion) for the 2025 fiscal year. Modi is projected to invest 143 trillion rupees to modernize critical infrastructure in the six years through 2030.

India's infrastructure and capital goods bellwether Larsen & Toubro Ltd. is trading at a price-earnings ratio of about 30 times. At the same time, other firms such as PNC Infratech Ltd. and JSW Infrastructure Ltd. are still trading at or below their 10-year average valuations.

The South Asian nation has also fast emerged as an alternative to China for global manufacturing, with the likes of Apple Inc. beefing up its production facilities in the country.

Modi’s party faces a national election this year, and he has made India’s accelerating economy a major part of his pitch. He is expected to return as prime minister with a strong majority to deepen infrastructure investment and manufacturing. Should he lose, it may derail the infrastructure and manufacturing push. Investors don't seem concerned though, with more than four-fifths of respondents saying the impact of the elections on markets would be negligible or doesn’t concern them. ‘Expensive’ India Lures Investors Avoiding China Risks_2

‘Expensive’ India Lures Investors Avoiding China Risks_2

Japanese value stocks, typically larger and well established firms that trade at relatively cheap metrics, were also identified by more than a third of respondents as an attractive investment.

One of the main reasons for the rally in Japanese equities has been the corporate reforms pursued by the Tokyo Stock Exchange.

“Japanese companies are dealing with the TSE’s request seriously,” said Fumie Kikuchi, a research analyst at GMO in Singapore. “It means a lot that now corporate management speaks the same language that investors do.” ‘Expensive’ India Lures Investors Avoiding China Risks_3

‘Expensive’ India Lures Investors Avoiding China Risks_3

In China, meanwhile, slowing economic growth, the specter of deflation and the ongoing real-estate crisis are likely to deter investors, according to Adrian Zuercher, head of global asset allocation and co-head for global investment management APAC at UBS Global Wealth Management.

“There’s very little incentive to allocate to China," he said. "We're still in a deflationary environment, and as long as we don't seem to be trending upwards — which would create more revenue growth — there is very little appeal."

Source：Bloomberg

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Samantha Luan

Commodity

Forex

Stocks

US Equity Markets: Friday Losses and the Middle East

On Friday, US consumer sentiment numbers garnered investor attention. The Michigan Consumer Sentiment Index fell from 79.4 to 77.9 in April. Significantly, inflation expectations for the year ahead further impacted expectations of a June Fed rate cut. The Michigan Inflation Expectations Index increased from 2.9% to 3.1%.

On Friday, the Nasdaq Composite Index slid by 1.62%. The Dow and the S&P 500 saw losses of 1.24% and 1.46%, respectively.

The extended losses from Friday and news of Iran attacking Israel will set the tone for the Monday Asian session. A flight to safety could adversely impact buyer demand for riskier assets.

Asian Economic Calendar: Japan in Focus

On Monday, machine order numbers from Japan will draw investor attention. Economists forecast machine orders to decline by 8.0% year-on-year in February after falling 10.9% in January. Weaker-than-expected numbers would signal a weakening demand environment and impact export-listed stocks.

Moreover, investors should consider trade data from China. The numbers were available after the ASX 200 and Nikkei sessions on Friday.

Exports declined by 7.5% year-on-year in March after rising 5.6% in February. Imports decreased by 1.9% year-on-year after declining by 8.2% in February. The US dollar trade surplus narrowed from $125.16 billion to $58.55 billion.

The weaker-than-expected trade data contrasted with improving manufacturing PMI numbers from China. Additionally, the numbers could raise expectations of a stimulus package from Beijing.

Commodities: Crude Oil, Gold, and Iron Ore

Investors should consider commodity prices. The news from the Middle East could spike crude oil and gold prices. Concerns over supply disruptions would drive crude oil prices higher. A flight to safety could fuel demand for gold.

On Friday, WTI ended the session up 0.75% to $85.66. Gold spot fell by 1.19% to $2,344. Iron ore futures ended the session down 0.18% on the Singapore exchange.

The USD/JPY, the Intervention Zone, and the Nikkei

The USD/JPY remained within the intervention zone at 153.210 on Friday. Risk aversion could drive buyer demand for the Japanese Yen, favored over the US dollar. A pullback in the USD/JPY could impact buyer demand for Nikkei-listed export stocks.

ASX 200 Hang Seng Index, Nikkei 225, ASX 200: Flight to Safety After Iran Attack_1

The ASX 200 fell by 0.33% on Friday. Tech stocks cushioned the downside. The S&P ASX All Technology Index (XTX) gained 0.12%. However, bank, gold (XAU/USD), mining, and oil stocks contributed to the losses.National Australia Bank Ltd. (NAB) and Commonwealth Bank of Australia (CBA) declined by 0.44% and 0.49%, respectively. ANZ Group Holdings Ltd. (ANZ) and Westpac Banking Corp. (WBC) fell by 0.03% and 0.31%, respectively.Rio Tinto Ltd. (RIO) and BHP Group Ltd (BHP) saw losses of 0.27% and 0.91%, respectively. Fortescue Metals Group Ltd. (FMG) declined by 0.12%.Woodside Energy Group Ltd (WDS) and Santos Ltd (STO) fell by 1.27% and 0.38%, respectively.Gold stocks had a mixed session. Northern Star Resources Ltd. (NST) declined by 0.39. Evolution Mining Ltd (EVN) advanced by 0.51%.

Hang Seng Index Hang Seng Index, Nikkei 225, ASX 200: Flight to Safety After Iran Attack_2

On Friday, the Hang Seng Index slid by 2.18%. Property stocks and tech stocks contributed to the losses. The Hang Seng Tech Index (HSTECH) and Hang Seng Mainland Properties Index (HSMPI) ended the session down 1.81% and 3.78%, respectively.Tencent (0700) and Alibaba (9988) saw losses of 1.71% and 3.44%, respectively.Bank stocks also had a negative session. HSBC (0005) declined by 1.62%. China Construction Bank (0939) and Industrial Commercial Bank (1398) slid by 1.84% and 1.97%, respectively.

The Nikkei 225 Hang Seng Index, Nikkei 225, ASX 200: Flight to Safety After Iran Attack_3

The Nikkei advanced by 0.21% on Friday.Bank stocks ended the session in negative territory. Sumitomo Mitsui Financial Group Inc. (8316) and Mitsubishi UFJ Financial Group Inc. (8306) fell by 0.88% and 0.80%, respectively.However, it was a mixed session for the main components of the Nikkei.Fast Retailing Co. Ltd. (9983) bucked the trend, tumbling 4.40%.Sony Group Corporation (6758) and Tokyo Electron Ltd. (8035) rallied 1.44% and 1.49%, respectively. KDDI Corp. (9433) and Softbank Group Corp. (9948) gained 0.21% and 0.45%, respectively.

For upcoming economic events, refer to our economic calendar.

Source: FX Empire

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Glendon

Economic

MeasurementInflation is a constant companion in the economic landscape. It impacts everything from grocery bills to wages, and understanding how it's measured is crucial for informed financial decisions. In the United States, two primary inflation metrics take center stage: the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE). While both measure inflation, they have distinct characteristics and can yield slightly different results.

This article delves into the intricacies of the CPI and PCE indexes, exploring their methodologies, limitations, and implications for understanding inflation.

Decoding the CPI: A Household-Centric Lens

The Consumer Price Index (CPI) is a widely recognized inflation gauge. It reflects the change in the average price of a basket of goods and services purchased by urban consumers over time. The Bureau of Labor Statistics (BLS) meticulously calculates the CPI by:

Identifying a basket of goods and services: This basket represents the typical purchases of urban households, encompassing essentials like food and housing, as well as discretionary items like entertainment. The weights assigned to each category reflect their relative importance in household spending.

Tracking price changes: The BLS monitors the prices of these goods and services across a vast network of retail outlets throughout the country.

Calculating the average price change: By comparing current prices to a baseline period (usually the previous year), the BLS calculates the overall change in the basket's price.

The CPI serves as a benchmark for various economic adjustments, including wage negotiations, cost-of-living adjustments (COLA) for Social Security recipients, and even tax brackets.

Limitations of the CPI

Urban Focus: The CPI only considers urban consumer spending, neglecting the price changes experienced by rural populations.

Substitution Effect: The CPI doesn't fully account for consumer substitution behavior. If the price of one item rises, consumers might switch to a cheaper alternative. The CPI might overestimate inflation if this substitution effect isn't adequately captured.

Fixed Basket: The basket of goods and services is updated periodically, but there might be a lag in reflecting changing consumer preferences.

Unveiling the PCE: A Broader PerspectiveThe Personal Consumption Expenditures Price Index (PCE) offers a complementary perspective on inflation. It measures the change in the prices of goods and services consumed by all households in the U.S., including both urban and rural residents.

Additionally, the PCE considers:

Consumption funded by others: Unlike the CPI, the PCE incorporates the cost of goods and services purchased on behalf of consumers, such as employer-provided health insurance and government programs like Medicare.Durable goods: The PCE treatment of durable goods (items lasting more than three years) differs slightly from the CPI. The CPI reflects the full purchase price of a durable good, while the PCE considers the "consumption value" used over time.

The Federal Reserve's Preference

The Federal Reserve, the central bank of the U.S., closely monitors both CPI and PCE but often places greater emphasis on the PCE for its monetary policy decisions. The PCE is viewed as a more comprehensive measure of inflation, encompassing a broader range of consumer spending and potentially capturing substitution effects more effectively.

Understanding the Discrepancies: CPI vs. PCEWhile both indexes measure inflation, they can sometimes yield slightly different results. Here's a breakdown of the potential discrepancies:

Scope: The broader scope of the PCE, including rural spending and healthcare expenditures paid by others, can lead to a slightly lower inflation reading compared to the CPI, which focuses solely on urban out-of-pocket spending.

Basket Update Schedule: The CPI updates its basket of goods and services every two years, while the PCE updates it quarterly. This difference can affect how quickly each index reflects changes in consumer preferences.

The Takeaway: A Multifaceted View of InflationUnderstanding the nuances of both the CPI and PCE indexes empowers individuals to gain a more comprehensive understanding of inflation. While the CPI provides a widely recognized benchmark, the PCE offers a broader and potentially more accurate picture of inflationary trends. By considering both metrics, you can make informed decisions about your finances and navigate the economic landscape with greater confidence.

To stay updated on all economic events of today, please check out our Economic calendar

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Thomas

Economic

Stocks

During the 1997/98 Asian financial crisis, US Federal Reserve chairman Alan Greenspan famously said that Asia got into trouble because it was mainly a bank-dominated financial system that lacked a "spare tyre". In American parlance, the spare tyre is the stock market, with the US stock market being the largest and deepest in the world, accounting for 47% of global market capitalisation (according to the World Federation of Exchanges).

American companies rely on the stock market and profits to fund their growth and less on the banking system. Which was why American companies and the US economy recovered faster after the 2008 global financial crisis than the bank-dominated European, Japanese and Chinese corporate sectors.

Here are some interesting facts. The Chinese economy grew three times faster in gross domestic product (GDP) terms (averaging 6% a year) than the American economy between 2012 and 2023 (averaging 2% a year), but its stock markets — the Shenzhen and Shanghai stock exchanges — grew 3.5% and 2.7% a year, with market cap growing 34% to 47%, respectively, over this period. The Nasdaq’s market cap grew 4.6 times, with the index growing 17% a year on average over this period.

By comparison, Hong Kong’s Hang Seng Index declined 1.2% on average over this period and the FTSE100 London also lagged at 2.7% growth a year. Japan has lagged in GDP growth, but the Nikkei 225 averaged 13.2% per annum over the last decade or so.

In essence, the US stock market added US$10 trillion to investor wealth in 2023, even though real estate prices, especially commercial real estate valuation, was flat. According to the latest Fed Flow of Funds accounts for end-2023, the foreign sector added US$2.7 trillion to their holdings of US equities at market value last year, which means that foreigners added in terms of new flows as well as share price gains.

The question we must ask therefore is whether growth is ultimately driven by the state (government), corporate, finance or household sectors? In the US, the state is a net absorber of resources, since the federal government’s net savings for 2023 was negative US$1.9 trillion, meaning it was a net dis-saver and borrower from the rest of the economy, including foreigners. The household sector is a net saver and also consumer that drives domestic growth.

The latest (December 2023) Flow of Funds data showed that the US corporate sector, plus Wall Street, is truly acting as the hedge fund of the world — it borrows through the US government’s large issuance of sovereign debt that commands a cost of roughly 3% to 4% per year for 10-year bonds. The returns on investments abroad by the corporate sector and households would be at least double to triple that. The US earned a net income from the rest of the world of around US$160 billion to US$180 billion per year between 2021 and 2023.

Unlike bank-dominated systems, US corporations run on a low debt-to-equity ratio of between 19% and 27%. Bank-dominated corporates in Asia typically run debt-to-equity ratios of 50% or above. Having shifted production outside the US, American corporations are concentrating on asset-light strategies where the return on equity (ROE) is higher. Non-financial assets account for just under 40% of total assets, of which intellectual property rights have risen by US$521 billion between 2021 and 2023 to US$3.55 trillion, or 7.2% of total corporate assets at end-2023. In other words, US corporations focus on research and development in software, rather than just production of hardware.

The bottom line is that if US corporations continue to drive profits and the monetisation of their technology (especially artificial intelligence, or AI) whereas the rest of the world stays in the old economy (agriculture, manufacturing), the rest of the world will still be investing in the US stock market, and pay annual software charges to the Magnificent Seven, which will concentrate on top AI software, chips, data centres and smart equipment. Sounds like a Microsoft model of new tech development?

As military historian Yuval Noah Harari says, the ultimate aim of AI is the mental colonisation of the users. If the rest of the world believes and is willing to pay for American ideas and concepts, the American business model will be the top dog for years to come.

What are the implications for economies like Malaysia?

Bursa Malaysia’s Composite Index was 1,530.73 at end-2011, not much different from the current level of 1,550. During this period, the Malaysian economy grew twice as fast as the US economy (4% to 5% versus 2% per annum) and yet our stock market has been flat. As explained above, the US stock market is purely private led, whereas the Malaysian stock exchange is dominated by government-linked companies. These account for 36% and 54% of Bursa Malaysia’s market cap and the Kuala Lumpur Composite Index respectively.

Therefore, we need to ask — is the current corporate strategy for the country as a whole sustainable? If Malaysian listed corporations continue to lag in profitability (ROE) and with the ringgit depreciating against the US dollar, is the economy dragged down by the performance of the corporate sector, and why? After all, a depreciating ringgit actually gives Malaysian corporate exporters higher revenues in ringgit terms.

The answer is clearly very complex, but using the US model as a benchmark, we need to rethink whether we should concentrate on knowledge-based growth, rather than commodity (oil and gas, and palm oil) earnings. Technology is well accepted as the way forward, especially how we can use AI to improve total factor productivity (TFP).

Will the state or the corporate sector lead this AI/TFP revolution or transformation? Other emerging markets are clearly thinking through these issues, with India, Singapore, South Korea and Taiwan taking the lead. In short, if the corporate sector does not take the lead in AI and ESG (environmental, social and governance) transformation, expect the stock market to underperform even GDP growth.