Investors Waiting For CPI But China's Producer Deflation May Be More Consequential

To gain an edge, this is what you need to know today.

China’s Producer Deflation

Please click here for a chart of Xtrackers Hvst CSI 300 China A-Shs ETF ASHR.

Note the following:

• The chart shows that unlike the U.S., the Chinese market has not staged a significant rally this year. China is important because it is the second largest economy in the world.
• The stock market rally in the U.S. is driven by the AI frenzy that has caused money to flow into seven magnificent stocks. The magnificent seven stocks are Apple Inc AAPL, Amazon.com, Inc AMZN, Alphabet Inc Class C GOOG, Meta Platforms Inc META, Microsoft Corp MSFT, NVIDIA Corp NVDA, and Tesla Inc TSLA.
• China is the biggest competitor to the U.S. in artificial intelligence.
• The chart shows that the AI rally in Chinese stocks has fizzled.
• China is close to deflation. Consumer Price Index (CPI) in China is important for the Chinese domestic economy, but Producer Price Index (PPI) in China is important for the rest of the world, including the U.S. For this reason, investors should pay attention to PPI in China. Here is the data:
  • China’s CPI came at 0.0% year-over-year vs. 0.2% consensus.
  • PPI in China came at -5.4% year-over-year vs. -5% consensus.
  • PPI in China has now fallen for nine consecutive months.
• China is the factory to the world. As producer prices in China fall, prices of exports from China also fall. This is helping reduce goods inflation in the U.S. and making overall inflation numbers look good.
• As we have written before, in The Arora Report analysis, it is the core services inflation ex-housing that is important for investors. This includes items such as cost of travel, restaurants, and haircuts. The Fed is also focused on core services inflation.
• In The Arora Report analysis to counter deflation, the Chinese government is likely to provide stimulus. Investors love stimulus as stimulus creates more money. A part of the stimulus money rushes into the stock markets. 
• In The Arora Report analysis, investors should not get too optimistic about stimulus in China because the Chinese government is likely to exercise restraint due to massive debt issues at the local government level.  
• All eyes are on CPI that will be released on Wednesday, July 12 at 8:30am ET.
  • The consensus for both headline and core CPI is 0.3%.
  • Whisper numbers are 0.2% for headline CPI, and that is the reason momo gurus are using to prompt buying of stocks ahead of CPI release. As is their pattern, the momo crowd is buying ahead of key data on hope strategy.  In contrast, smart money takes risk control measures ahead of key data. Our decades of experience show that in the long term, hope is not a good investing strategy.  
• Taiwan Semiconductor Mfg. Co. Ltd. TSM is the world’s largest contract semiconductor manufacturer. TSM manufactures chips for the likes of Apple, Nvidia, and Advanced Micro Devices, Inc. AMD. TSM reported June 2023 revenues declined 11.1% year-over-year.
• Negative data from TSM comes on the heels of negative semiconductor production data from Samsung Electronics Co Ltd SSNLF.
• Prudent investors need to make note of the semiconductor production data from TSM and Samsung since semiconductors have been the leading sector in this year’s stock market rally.  Investors have been running up semiconductor stocks on the AI frenzy and also on the assumption that the order downdraft has bottomed.
• As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

Momo Crowd And Smart Money In Stocks

The momo crowd is buying stocks in the early trade.  Smart money is inactive in the early trade.

Gold

Gold is seeing selling on China inflation data. 

The momo crowd is selling gold in the early trade.  Smart money is inactive in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is buying oil in the early trade.  Smart money is inactive in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin BTC/USD is range bound.

Markets

Our very, very short-term early stock market indicator is negative. This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 21% - 39% in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 3% - 6%, and short term hedges of 5% - 8%. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less.  Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

The Arora Report is known for its accurate calls.  The Arora Report correctly called the 2008 financial crash, the start of a mega bull market in 2009, the COVID crash, the post-COVID bull market, and the 2022 bear market.  Please click here to sign up for a free forever Generate Wealth Newsletter.