The numbers for the week – 18th October 2021
Markets last week
Market volatility subsided during the week, as economic data showed a bottoming in activity in the US and as concerns about the Chinese property sector waned. The Chinese authorities eased mortgage curbs and the central bank added medium-term funds to the liquidity system. In addition, the early numbers in the US Q3 corporate reporting season were very positive and boosted investor sentiment.
Inflation numbers in the US were still very high, but the underlying details showed a possible reduction ahead at the core level, rather than the headline which includes soaring energy prices. This was seen as bullish both for equities and bonds, helping bring government bond yields lower after the previous spike. Chinese inflation continued to set market strategists a conundrum, as the consumer price inflation (CPI) fell to a very low 0.7% whilst the producer price inflation (PPI), i.e. input inflation, soared to 10.7%, while the Chinese trade surplus ballooned again.
Jobless claims in the US were also much lower than forecast and started approaching pre-COVID-19 levels showing that the end of pandemic unemployment benefits encouraged people to get a job. Data in the UK and Europe, however, were generally softer.
Markets were also pushed and pulled by comments from various members of central banks (mostly the US Federal Reserve and the Bank of England’s Monetary Policy Committee), depending on whether they are hawks or doves on interest rate policy.
Commodities surged during the week, with copper up 10% and reclaiming the US$10,000 handle per metric tonne and oil up more than 3%. Unsurprisingly against that backdrop the US dollar weakened against the euro and sterling.
At the end of the week, equities were up significantly, with the UK and Europe leading whereas Japan lagged as the yen fell sharply due to the risk-on environment. The best performing sectors were a mixed bunch of materials, real estate and technology. Government bond yields fell by 4 bps for the US 10-years and 5 bps for the UK.
The week ahead
Wednesday: UK CPI, RPI and PPI
Our thoughts: inflation is still the main investment topic these days and the mood is nowhere worse than in the UK, where members of the Monetary Policy Committee (MPC) have been preparing the public for a potential rise in UK interest rates. In that respect, the data on Wednesday will be crucial for the MPC’s decision process. The CPI is the real issue. Although it is expected to ease slightly from August’s levels, it could still make uncomfortable reading. The retail price index (RPI) is used less these days and the PPI could well show some eye-wateringly high readings, but these might not necessarily translate into future CPI levels. Logically, the details matter more than the headline, but in the current mood, they might not be that meaningful.
Thursday: UK September public finances
Our thoughts: once again, does the government have enough wiggle room to manoeuvre through the crisis with the furlough scheme ending, bottlenecks and supply chain issues hitting the consumer and the Bank of England talking about hiking? The public sector net borrowing requirement is expected to rise further after a few months of less borrowing. The levels will matter, but also the direction.
Friday: Markit manufacturing and services PMIs for the UK, Eurozone, Japan and the US
Our thoughts: growth has been hampered worldwide by supply issues and Q3 GDP is expected to be much lower than previous quarters with a natural concern about the upcoming quarters. The PMIs so far have been behaving very well, showing a potential recovery ahead despite the current supply chain problems and energy price spikes. On Friday, we will get a full picture of the main parts of the world that move markets. Is manufacturing still holding up, despite shipping constraints? Has any softness moved to the services sector, affecting consumer spending? Various parts of the world might have very different results.
Markets for the week
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||2.00%||-7.00%||1.00%||-8.00%|
|Emerging market equities||2.10%||-0.60%||1.10%||-1.40%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.57%||-4||66|
|10-year German Bund||-0.17%||-2||40|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||84.86||3.00%||63.80%|
|WTI oil (bbl)||82.28||3.70%||69.60%|
|Copper (metric tonne)||10281||9.80%||32.40%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Quite a few Fed and MPC members give their take on ‘transitory inflation’
St. Louis Fed President, James Bullard (part of the US Federal Reserve or Fed), said this year’s surge in inflation may well persist amid a strong US economy and tight labour market. “I would put 50% probability on the dissipation story and 50% probability on the persistent story.” Bullard said he favoured beginning to scale back quantitative easing (QE) next month and completing the process by the end of the first quarter. Chair Jerome Powell had previously stated that the process of tapering the Fed’s US$120bn in QE would likely end around mid-2022.
Silvana Tenreyro and Catherine Mann of the Monetary Policy Committee in the UK gave the dovish view on Bank of England rates after the more hawkish view from Michael Saunders and Governor Andrew Bailey, arguing that rates should not go up prematurely due to transitory inflation. Governor Bailey had the last word, though, stating that the Bank of England would ‘have to act’ to stem inflationary forces against a backdrop of high energy price pressures lingering.
Strong jobs numbers. The inflation reading doesn’t look so scary in the details
Surveys: the NFIB small business optimism index fell from 100.1 to 99.1. The Empire State Manufacturing Survey fell sharply from 34.3 to 19.8, below estimates. The University of Michigan Sentiment Index was a little lower at 71.4 vs. 72.8, with current conditions dropping from 80.1 to 77.9 and expectations easing from 68.1 to 67.2.
Sales: retail sales rose 0.7% in September, above expectations, with sales ex auto and gas up 0.7% and the retail sales control group up 0.8%.
Employment: the JOLTS job openings fell from 11.1 million to 10.44 million, although the quits rate rose to 4.3 million or 2.9% of job holders, a record, contributing to the job opening number.
Initial jobless claims dropped sharply from 329K to 293K, with continuing claims also falling from 2727K to 2593K. The initial claims level is not far above the 218k average for 2019.
Inflation: the CPI was still showing a high headline number of 5.4% vs. 5.3% previously, with core CPI stuck at 4.0%. The underlying trend, however, shows a reduction in monthly core CPI. In April, May and June, the month-to-month change for core CPI was 0.9%, 0.7% and 0.9%, respectively. In September, it was 0.24%. This compares to the monthly average for 2018-19 of 0.18%. The inflation expectations within the University of Michigan sentiment survey changed slightly, with the 1-year inflation higher at 4.8% vs. 4.6% but the 5-10-year inflation lower at 2.8% vs. 3.0%.
The PPI for September fell from 0.7% to 0.5%, with the core PPI ex food and energy falling from 0.6% to 0.2% and the year-on-year numbers rising from the previous month but below estimates, at 8.6% for the headline PPI. 6.8% for the core PPI ex food and energy and 5.9% for the PPI ex food, energy and trade.
The import price index rose 0.4% in September, up from -0.3% the previous month, but below estimates, for a year-on-year price index of 9.2% up from 8.9%. The export price index was lower at 0.1% for the month down from 0.4% for a year-on-year growth of 16.3% vs. 16.8%.
Housing: MBA mortgage loans rose a small 0.2% during the week, up from -6.9% previously.
Growth still challenged but employment picked up as furlough comes to an end
Employment: UK payrolls climbed by a record 207,000 in September, while job vacancies rose to 1.2 million, also an all-time high. The number of people in work rose 235,000 in the three months through August, the biggest quarterly increase since 2015. Unemployment ticked down to 4.5% from 4.6%. Pay growth cooled in the three months to 6.0% from 6.8% in July. The September claimant count rate fell from 5.4% to 5.2%.
Sales and trade: the BRC sales like-for-like fell 0.6% in September after a rise of 1.5% the previous month. The visible trade balance increased from £14.1bn to £14.9bn in August.
Growth: the August GDP numbers showed a marginal improvement at 0.4% (although below estimates) with the 3-month growth at 2.9% down from 4.2% the previous month. The breakdown favoured manufacturing over services: industrial production was up 0.8%, with manufacturing up 0.5% and construction output down 0.2%. The index of services rose a moderate 0.3% and only 3.7% 3 months/3 months compared to 5.2% previously.
Housing: the RICS (Royal institute of Chartered Surveyors) house price balance fell from 72% to 68%.
Surveys: the ZEW expectations survey for the eurozone fell from 31.1 to 20.1. The ZEW expectations for Germany fell from 26.5 to 22.3 but the current situation slumped from 31.9 to 21.6, way below expectations. The Bank of France industrial sentiment fell from 103 to 100 in September.
Industry: eurozone industrial production fell 1.6% in August vs. a rise of 1.4% the prior month. EU27 new car registrations fell 23% in September, the worst such month in over 25 years, mostly due to the semi-conductor shortage.
Trade: the eurozone trade surplus fell from €13.5bn to €11.1bn in August.
Mostly favourable data from China despite slowdown but Japanese growth still elusive
China: the trade balance swelled from US$58.3bn to US$66.8bn in September, with exports rising 28.1% year-on-year and imports rising 17.6%.
The CPI eased from 0.8% to 0.7% year-on-year in September. This extremely moderate inflation rate contrasts with the PPI which surged from 9.5% to 10.7%, suggesting that business margins are suffering.
The narrower gauges of money supply fell as the broader measurement was still very high: M0 rose 5.5% year-on-year vs. 6.3% the previous month, M1 fell from 4.2% to 3.7% but M2 edged up from 8.2% to 8.3%.
The monthly data release for September showed annual GDP falling from a high 7.9% in Q2 to 4.9% in Q3, with a quarterly print of a skinny 0.2%. Retail sales rose 4.4% year-on-year, up from 2.5% the previous quarter, industrial production was a weak 3.1% down from 5.3%, fixed assets ex rural (i.e. investment) fell to 7.3% from 8.9%, property investment also dropped from 10.9% to 8.8% and the surveyed jobless rate was also lower at 4.9% from 5.1%.
Japan: bank lending was unchanged in September, up 0.6% year-on-year. The PPI rose from 5.8% to 6.3%. The M2 money stock fell from 4.7% year-on-year to 4.2%, with M3 down from 4.2% to 3.8%.
Core machine orders fell 2.4% in August vs. a rise of 0.9% previously, but the year-on-year growth increase from 11.1% to 17.0%. Industrial production fell 3.6% in August, with the year-on-year number easing from 9.3% to 8.8%. Finally, capacity utilisation fell 3.9% in August.
Oil prices were still on a roll during the week, as Brent crude increased 3.7% and WTI 3%. Industrial metals recovered from their previous softness, with copper up almost 10%.