The numbers for the week – 15th November 2021

The numbers for the week – 15th November 2021

Markets last week

If there were any lingering beliefs that the current rise in inflation may be purely transitory, they were put to rest last week, with a 6.2% US CPI (consumer price index) and a 13.5% Chinese PPI (producer price index). Further similar numbers from traditionally stable-price countries like Germany and Japan also helped to focus markets on the higher inflation picture.

Economic data were generally supportive, with better surveys in Europe and Japan and continued low jobless claims and high job openings (and quits) in the US.  Consumer confidence in the US, however, was hit by the price surge, a trend that has been going on for some time now.

Equities did not suffer unduly from the eye-watering price rises. Indeed, with inflation increasing without central bank intervention, they tended to drift sideways. Government bonds, however, took it on the chin, making a round trip after the previous week’s drop in yields when central banks held fire on rate hikes.

The US dollar was boosted by these price indices and gold came back from a long hibernation to provide strong returns. Many of these market moves were quite sudden.

On the political front, President Biden did not exercise the right to sell from the US Strategic Petroleum Reserve and hence did not cap oil market prices. He is also facing a combination of decisions on appointments to the US Federal Reserve (Fed), including whether to reappoint the Chair, Jay Powell, with the markets in an expectative mode.

At the end of the week, most equity markets were flat, except for emerging markets which recovered on hints of a better regulatory backdrop in China. Sectors were mixed, with materials and information technology at the top and energy and utilities at the bottom. The US dollar staged a major rally against developed currencies as US treasury bond yields rose faster than European or UK yields.

The week ahead

Tuesday: UK employment data

Our thoughts: the end of the furlough scheme is complicating employment statistics in the UK. How many people have gone back to work following the end of the support system? The September unemployment rate and employment change may not reveal the economic trends yet, but the October claimant count rate and jobless claims change may offer a more updated picture.

Tuesday: US retail sales for October

Our thoughts: so much has been said about how the US consumer must be suffering due to high inflation, supply bottlenecks and empty shelves that many could be forgiven for assuming that retail sales are in a nosedive. Nothing could be further from the truth. The expectation is still for strong growth in retail sales in October, but the important data for markets will be the sectoral breakdown, how much is driven by the auto sector for instance, and the ‘control group’ store-by-store. In a nutshell, are high prices driving consumers away or are they paying up?

Wednesday: UK CPI, RPI and PPI for October

Our thoughts: after the eye-watering CPI numbers in the US and in light of the Bank of England’s stay on interest rate rises, all eyes will be on UK inflation this week. How high can the CPI go? Which areas are driving inflation? Is it spreading to various sectors? How much is caused by producer prices (PPI)?

Markets for the week

In local currencyIn sterling
IndexLast weekYTDLast weekYTD
FTSE 1000.60%13.70%0.60%13.70%
FTSE 250-0.20%15.00%-0.20%15.00%
FTSE All-Share0.50%14.20%0.50%14.20%
US Equities-0.30%24.70%0.20%26.80%
European equities0.20%23.00%-0.30%17.20%
Japanese equities0.00%13.10%0.00%3.80%
Hong Kong equities1.80%-7.00%2.30%-5.90%
Emerging Markets
Emerging market equities1.70%-0.40%2.20%1.30%
Government bond yields (yield change in basis points)
Current levelLast weekYTD
10-year Gilts0.91%772
10-year US Treasury1.56%1165
10-year German Bund-0.26%231
Current levelLast weekYTD
Japanese yen/USD113.89-0.40%-9.30%
Commodities (in USD)
Current levelLast weekYTD
Brent oil (bbl)82.17-0.70%58.60%
WTI oil (bbl)80.79-0.60%66.50%
Copper (metric tonne)97112.00%25.00%
Gold (oz)1864.92.60%-1.80%


Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

Changes at the Fed

US Federal Reserve (Fed) Vice Chair Richard Clarida said the “necessary conditions” for the Fed to hike interest rates will probably be in place at the end of next year. “While we are clearly a ways (sic) away from considering raising interest rates, I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022,” he said, referring to the labour market and inflation tests laid out by the Fed to raise rates. Clarida said he expected inflation pressures to ease as the labour market and global supply chains eventually adjust but he added that the risks to inflation are to the upside. “Inflation so far this year represents much more than a ‘moderate’ overshoot of our 2% longer-run inflation objective, and I would not consider a repeat performance next year a policy success.”

Fed Governor Randal Quarles will step down in the last week of December, freeing up another vacancy for President Biden to fill.  Quarles was seen as bank-friendly and this is not well-regarded in the White House and the Democratic Party. In addition, the afore-mentioned Vice Chair Richard Clarida’s term as a governor expires at the end of January, and there is also an open seat on the board.

President Biden recently met with Chair Powell and Fed Governor Lael Brainard. Brainard is the only sitting governor on the board appointed by a Democrat who is seen as a contender for all three leadership positions. If Powell returns for a second term as chair, he has said he’ll defer to Biden’s next vice chair appointee to take the lead on Wall Street oversight. Together, these appointments give Biden an opportunity to reshape the Fed Board.


United States

Inflation, inflation, inflation…

Surveys: the NFIB small business optimism index unexpectedly fell from 99.1 to 98.2. US small businesses also reported continued concerns about rising prices and wages, with 50% of small businesses planning to raise average selling prices and 30% planning to raise worker compensation in next 3 months.  The University of Michigan sentiment index fell from 71.7 to 66.8, a 10-year low, with current conditions also down from 77.7 to 73.2 and expectations from 67.9 to 62.8.

Inflation: the PPI (producer price index) rose 0.6% in October or 8.6% year-on-year with the core PPI up 0.4% or 6.8% year-on-year.

The CPI (consumer price index) rose to the highest rate since 1990, up 6.2% from October 2020 and 0.9% from September, the largest monthly gain in four months. There were higher prices for energy, shelter, food and vehicles fuelling the index reading and indicating inflation is broadening out beyond categories associated with reopening. The core CPI (ex food and energy) rose 0.6% from the prior month and 4.2% from a year earlier, the largest annual increase since 1991.

Food and energy prices were notable on the upside, new and used cars too, but it’s the rise in rents that is catching attention. Shelter prices rose, with the main category (owner’s equivalent rent) up 0.4%, the largest advance since June 2006. Also, inflation picked up across several services ex-shelter categories, in particular medical care services.

The University of Michigan sentiment index embedded inflation survey rose from 4.8% to 4.9% for 1 year but remained at 2.9% for the 5-10 year expectation reading.

Housing: MBA mortgage applications rose 5.5%, up from a negative 3.3% the previous week. Mortgage delinquencies for September fell from 5.47% to 4.88% and MBA mortgage foreclosures also eased from 0.51% to 0.46%.

Employment: initial jobless claims were slightly down, from 271K to 267K, with continuing claims actually higher at 2.16 million, up from 2.1 million.  The JOLTS (job openings and labour turnover series) job openings eased slightly but remained at a very high level, at 10.4 million jobs vs. 10.6 million previously. The quits rate rose from 2.9% to 3%, i.e. 4.4 million people.

United Kingdom

Not much growth in September

The September monthly GDP rose by 0.6%, beating expectations, although the previous month’s reading was revised down. This brought third quarter growth to 1.3% or 6.6% annualised. The September number was driven by a strong construction output, up 1.3%, and services rising 1.6%, whereas industry disappointed, down by 0.4%.

The visible trade balance for September widened from £13.7bn to a deficit of £14.7bn.


Mixed surveys

In the eurozone, the ZEW survey expectations rose from 21.0 to 25.9. Likewise for the German survey, with expectations soaring from 22.3 to 31.7 but the current situation simultaneously slumping from 21.6 to 12.5.

Industrial production in the eurozone fell 0.2% in September, better than the 1.7% drop the previous month, for a year-on-year growth of 5.2%, up from 4.9%.

The German wholesale price index soared 1.6% in October for a year-on-year reading of 15.2%, up from 13.2% previously.


Producer price inflation surge in both China and Japan

China: the CPI (consumer price index) more than doubled from 0.7% to 1.5% but it’s the PPI (producer price index) that spooked markets, rising from 10.7% to 13.5%, above expectations and at a 26-year high. Part of the producer price increase is due to power shortages. With the renminbi (Chinese currency) strong vs. the US dollar and other currencies, this means that China is exporting significant goods inflation rather than the deflation of previous decades.

Money supply was still strong, with M0 up 6.2% year-on-year, up from 5.5%, M1 up 2.8% down from 3.7% and M2 up 8.7%, from 8.2%.

The now-famous online shopping extravaganza Singles Day on 11th November notched up its biggest take ever, with record sales of US$84.5bn.

Japan: the Eco Watchers Survey shows sharply increasing current conditions (55.5 vs. 42.1) and stable outlook (57.5 vs. 56.6).

Japanese machine tool orders have also picked up speed, rebounding from 71.9% to 81.5% year-on-year growth.

The PPI (producer price index) rose 1.2% in October, or 8.0% year-on-year, up from 6.4%. Money stock was unchanged, with M2 rising 4.2% year-on-year and M3 3.7%.

Oil/Commodities/Emerging Markets

Gold surprise

Gold rose sharply last week in reaction to US inflation. As mentioned before, gold doesn’t react to one-off spikes in inflation but tends to provide inflation protection when price rises are sustained.

Oil prices rose briefly, as President Biden opted not to tap into the US Strategic Petroleum Reserve to keep crude prices down, although at the end of the week crude prices were somewhat softer. Copper was more supported, however, as fears of a major Chinese slowdown abated.

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