🎙Market In-Focus- Business costs and Capital Spending🖨

The brand new series brings you fast-track insights on the leading topics that might affect your trading and investment decisions.

In our first episode of Market In-Focus, we will be looking at the impact of business costs on markets sentiments and their implications to the future capital spending pattern. After all, we are seeing higher CPI which is often the case when the PPI is high as some cost is passed on to the consumers.

Let’s walk through the park of discussion.

🪤 Input Pressure Remains Significant

October continued to see businesses experiencing pressure in the input cost of materials. For example, on Tuesday, we saw the Producer Price Index rose by 0.6%, which is 0.1% higher than expected. But, more importantly, wholesale prices rose sharply by 8.6% compared to last year, which is seen as the highest pace since 2010. These data reflect a sustained period of higher input costs for businesses.

The substantial price gain was significant even after removing the effects of higher energy prices and food costs. We have also seen the fall in business confidence to a 7-month low, as The National Federation of Independent Businesses (NFIB) showed its index falling to 98.2 from 99.1 in the previous month. It was not expected as analysts were eyeing an increase.

On the surface, things look less promising.

💰Raising Price for Products

Here’s the catch. There is a higher proportion of businesses raising their selling price. The net percent of such business owners rose to 53%. Such increase in raising price movement is robust and was not seen since the 1980s when prices rose sharply. This reflects a general ability of businesses to pass on some costs to consumers, which could help with their profit margin.

🎉Capital Spending Intention Brightens

We are also seeing companies willing to spend more as the intention rose to a high point not seen since August 2018. This trend is in line with the sharp rise in companies raising the salary to attract hard-to-filled jobs. Therefore, companies are now willing to invest more in capital expenditure to become more efficient as they find it tougher to attract labourers to meet the sales demand of consumers.

And with that, it leads us to the missing element – productivity growth—a pointer which Pika World had discussed more frequently.

💡Productivity growth is Crucial

Rising wage is fundamentally sound if it is accompanied by productivity growth as it will help keep inflation stable. The simple idea is that if productivity growth increases more than inflation, companies need not raise prices to consumers.

Economists for a long time has been looking into productivity growth to help cushion the impact of a vast rise in prices given that the materials and labour market remains tight. Nonetheless, it is disappointing that productivity growth has weakened as wages have soared sharply.

Therefore, the NFIB’s capital-spending intention points to a sign of optimism that with such investment, productivity can improve. However, a note of caution is that business owners are feeling less optimistic about the economic condition than before and thus, the index reading, if weakened, may spell trouble.

As the wildcard of Covid continues to play out, it is hoped that the waning Covid-19 situation will boost confidence as business activities pick up with matching to the labour supply.

It is 11 Nov, Thursday, at 7 am in Singapore and 7 pm in New York. The week has been challenging for Pika World as our Tesla positions have affected our portfolio. Nonetheless, we believe this setback is a setup as a learning lesson for future success

Pika World wishes everyone a profitable week ahead!