Many investors are betting on an inflation peak. Here’s why a former hedge-fund manager says they’re wrong.

Before China grabbed the spotlight, holiday weekend sales, jobs and inflation data that due this week, as well as remarks by Fed Chairman Jerome Powell were the big focus.

Other questions are now swirling. Will China-related falls in oil prices lend to the peak inflation theory? And what about China’s post-COVID economic rebirth?

Onto our call of the day, which says it’s time to short long bonds because of sticky food inflation — thanks to China. It comes from Russell Clark, a former hedge-fund manager who has spent the last 20 years focusing on that market, macro and short selling. 

He notes investors have been scooping up the the iShares 20 years+ Treasury Bond ETF
TLT,
+0.67%,
a liquid exchange-traded fund that buys long-dated bonds, even as with U.S. inflation hovering at 1970 highs.

“The reason that people are getting bullish bonds I believe is that the yield curve has inverted. And every time that has happened, you have a recession and you want to get out of equities and into bonds,” says Clark. A yield curve inversion occurs when long-term interest rates drop below short term rates. The inversion of 2 and 10-year Treasury yields is at its steepest since the 1980s.

Clues may lie in Japan’s poorly performing bond market. “Not only has it been prescient in leading the U.S. bond yields lower from 1999 onward, in 2020 the JGB market was also prescient in signaling the future U.S. treasury sell off,” he says.

And what Japan is likely seeing that U.S. investors aren’t right now is China-driven food inflation. That’s something the Fed will find it tough to ignore, he said.

Since the since the 1980s, food commodity prices have followed raw commodity prices higher, If the Fed wants to work that down, it will raise interest rates. For example, falling natural-gas prices
NG00,
-2.48%
would help ease fertilizer costs for farmers.

Clark points out that China is the world’s biggest food importer, with much higher prices than the U.S.

“Pork, which is the most consumed meat in China, is now 3 times more expensive than the U.S. market, and has recently doubled in price. As Japan is also a large importer of pork, perhaps this was the reason the JGB market sold off before the U.S.,” he said.

Beef is also a major import for China, and yes, prices are much higher than that of the U.S.

“In essence, I am saying that China is exporting food inflation to the rest of the world, and I don’t see that ending at the moment. JGBs seem to agree – and when I look at the index value of US Food CPI on a log basis, I keep thinking that is says interest rates are going higher not lower,” said Clark.

He sees food inflation looking secular, rather than cyclical, due to the demands of an increasingly urbanized China. “Secular food inflation implies POLITICAL pressure to have higher interest rates. US treasuries look a short to me, just as everyone has gotten long,” he said.

The markets

Stock futures
ES00,
-0.64%

YM00,
-0.49%

NQ00,
-0.32%
are falling, and Treasury yields
TMUBMUSD10Y,
3.674%

TMUBMUSD02Y,
4.438%
and oil
CL.1,
-1.36%
also are falling. The Japanese yen
USDJPY,
-0.38%
is seeing some safe-haven bids. The Hong Kong Hang Seng Index
HSI,
-1.57%
closed down 1.5%.

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The buzz

China slightly eased some COVID-19 restrictions after protests spread across major cities following a deadly apartment-building fire in a locked-down city. A BBC reporter was arrested and beaten. Meanwhile, lockdowns mean China farmers are destroying crops they can’t sell.

And similar unrest at China’s Zhengzhou Foxconn
2317,
-0.50%
factory is expected to cause a shortfall of 6 million Apple
AAPL,
-1.80%
iPhone Pros this year. Apple shares are lower.

Pinduoduo shares
PDD,
+15.16%
are soaring after the China-based mobile marketplace reported profit and revenue beats.

MGM Resorts 
MGM,
-1.43%,
Las Vegas Sands 
LVS,
+1.20%
and Wynn Resorts 
WYNN,
+4.66%
are higher in premarket after Macao tentatively renewed their casino licenses.

Black Friday online sales topped a record $9 billion, though there’s little action from retailers. That’s as some wonder if Cyber Monday is still a thing.

St. Louis Fed President James Bullard will sit down for an interview with MarketWatch on Monday, at 12 noon Eastern. New York Fed President John Williams address the Economic Club of New York at the same time. Fed’s Powell will speak on Wednesday, along with several other Fed officials this week.

A busy data week starts Tuesday with home-price indexes and consumer confidence data. GDP, the PCE price index for October — a favored gauge of the Federal Reserve and November employment data are also on tap this week.

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