The numbers for the week – 8th November 2021
Markets last week
US equities hit a record every day last week, notching up 63 all-time highs this year. Global equities had a banner week as well, with Europe and Japan at the top. This was due to a confluence of factors: central bank pushback on tightening, solid earnings delivery and strong economic data.
Monetary policy was front and centre in markets. In a tale of two central banks, the US Federal Reserve (Fed) announced the beginning of tapering asset purchases, without mentioning future interest rate increases, and financial markets broadly welcomed the move. The next day the Monetary Policy Committee (MPC) of the Bank of England (BoE) kept both interest rates and asset purchases unchanged, surprising markets which were expecting a rate hike.
Bond yields slumped. Interestingly, the Fed was not the prime mover for lower US treasury yields. The US 10-year yield was unchanged the morning after the Fed communication. Then the MPC decision came in and US bond yields collapsed in sympathy with gilt yields, albeit not quite as much. The market rationale is that the BoE was seen as the first major central bank expected to raise rates. Since it pushed back on doing so, then the juggernaut of higher global rates was deemed to be delayed or softened. Government bond yields fell by 19 bps for the UK, 17 bps for Germany and 10 bps for the US in a global rethink about the speed of interest rate rises.
Despite the economic slowdown and concerns about supply chains and inflation affecting consumer confidence, manufacturing and services PMIs as well as employment numbers were strong last week.
The political calendar also came back with a vengeance. In the US the Virginia gubernatorial election saw an upset for President Biden’s Democratic Party, as the Republicans captured the governorship of this state which voted 10% more for Biden than Trump one year ago. As a result, with the looming prospect of losing a majority in both houses of Congress at next year’s mid-term elections, the government accelerated the effort to pass its infrastructure legislation and managed to get the US$550bn bill through the House of Representatives for Biden’s final approval.
Further collateral damage from the central bank moves included a stronger US dollar and weaker sterling, which dropped below US$1.35. Gold rallied by 2% but oil prices were kept in check by OPEC refusing to heed Biden’s request for a larger output increase.
Given the large drop in long-term bond yields, in equities, growth sectors like information technology and communications services had the best returns, with financials weakest.
The week ahead
Tuesday: Chinese CPI and PPI
Our thoughts: the puzzling discrepancy between the well-behaved Chinese CPI (consumer price index) and the double-digit PPI (producer price index) has been bothering markets for quite a few months and has reached the widest divergence since 1993. It is inevitable that Chinese corporate profits must be under stress if there is such a distance between producer and consumer prices, but, beyond the concern for Chinese companies, there is a bigger issue of global supply chains which often originate in China. The expectation this month is for the CPI to rise moderately, but the PPI to increase even further. This could add fuel to these concerns.
Wednesday: US CPI, core CPI and PPI
Our thoughts: US CPI inflation is still expected to rise further in October compared to the previous month, with even the core CPI ex food and energy surging over the month. Although the Fed has recently met and announced its change in tapering but no comment on future interest rate rises, everyone knows that their policy could change if inflation numbers remain sticky. The question with CPI will be the details: which items are causing the high increases? Are they the same as in previous months or are we seeing a spreading of price rises to other items? The PPI will also give a good indication of whether future CPI readings are likely to keep rising. In addition to Fed policy, higher prices will have an impact on US politics, as we saw in the Virginia election. With the mid-term elections in a year, consumer inflation matters enormously.
Thursday: UK Q3 GDP (and September) by sector
Our thoughts: the PMIs in the UK have remained extremely strong and point towards good growth. Third quarter (Q3) and September GDP should be above trend growth, but the details will be worth analysing: consumption vs. government spending, investment and net exports (or rather net imports). The current forecast shows consumption and investment leading and exports detracting massively. The September data will show a more recent picture, with the breakdown by manufacturing, services and construction output. September is the last month of the furlough scheme and hence may be a good guide toward future growth trends.
Markets for the week
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||-2.90%||-6.80%||-2.40%||-7.30%|
|Emerging market equities||-2.20%||-2.10%||-1.60%||-2.20%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.55%||-8||64|
|10-year German Bund||-0.11%||0||46|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||84.38||-1.30%||62.90%|
|WTI oil (bbl)||83.57||-0.20%||72.20%|
|Copper (metric tonne)||9496||-2.10%||22.30%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Fed and MPC communications trigger very different market reactions
The US Federal Reserve (Fed) announced the beginning of tapering, as widely telegraphed, with an option to stop or accelerate. Tapering will amount to US$10 bn/month for US Treasuries and US$5 bn/month for mortgage-backed securities beginning this month, which would eliminate quantitative easing (QE) purchases altogether by mid-next year. They also took out an explicit option to review after December whether that pace of tapering is appropriate. No comment was made on future rate hikes. In the statement, the Fed amended its comments on inflation from “largely reflecting factors that are transitory” to “factors that are expected to be transitory”.
ECB (European Central Bank) President Christine Lagarde renewed her pushback against market bets for an ECB interest-rate increase in 2022.
The Bank of England’s Monetary Policy Committee (MPC) said it needed to see more data on the UK labour market post-furlough before acting and hence held interest rates in a 7-2 decision, but the market bet seems to be that rates are due to rise at next month’s meeting. The MPC are expecting UK inflation to peak at 5% next year, fall to just below 3% in 2023 and normalise the following year. Three members voted to reduce QE but only by a very small amount (£855bn vs. £875bn).
There was a large market reaction in gilts and sterling, pointing to inadequate communication from the MPC to the markets on rates, unlike the Fed before them. Members of the MPC had indeed led markets to believe in a strong series of hikes over the next 12 months, only to quash these expectations.
The MPC has a more difficult task than the Fed, however, as it does not have the option to use flexible average inflation targeting like the Fed because UK CPI was higher than the BoE’s target over the last cycle. On the other hand, the tax rises coming from the Chancellor mean that the fiscal drag should be taken into consideration when raising interest rates.
In fiscal policy, the US$550bn US infrastructure fiscal package was finally passed by the House of Representatives, sending the bill to President Biden for his signature. This will focus on roads, bridges, broadband, clean water, power grid and pollution control. The larger US$1.75trn education, childcare and climate change legislation (‘Build Back Better‘), which includes tax hikes, is still stuck amid congressional disagreement.
Strong employment data and ISM surveys
Surveys: the ISM (Institute for Supply Management) manufacturing PMI was strong, at 60.8. Production was slightly under 60 but growth looked solid, particularly given the supply chain bottlenecks and shortages. Supply chain problems are not being solved as fast as markets are expecting, with prices paid rising from an already high 81.2 to 85.7. New orders fell from 66.7 to 59.8 but compared to inventories they are still very high. Employment improved from 50.2 to 52.0. The less meaningful Markit manufacturing PMI fell from 59.2 to 58.4.
The ISM services PMI surged 4.8 to a record high of 66.7. Overall business activity, new orders and backlogs were very strong, confirmed by declines in inventories. Prices showed their second-highest reading on record at 82.9. The one non-bullish detail is that employment declined for the third month, although it’s still above 50.
Industry and trade: US factory orders rose 0.2% in September, 0.7% ex transportation. The US trade balance (deficit) increased from US$72.8bn to US$80.9bn in September.
Housing: MBA mortgage applications fell 3.3% for the week despite a slight drop in mortgage rates.
Employment: initial jobless claims fell to the lowest pandemic level at 269K, down from 283K the previous week, with continuing claims dropping sharply from 2.239 million to 2.105 million. The monthly employment numbers for October were strong, with non-farm payrolls at 531K new jobs (of which 604K are private payrolls), plus 231K jobs of upward revisions to the previous two months. The unemployment rate declined from 4.8% to 4.6%, although the labour force participation rate remained stuck at a low 61.6%, and the underemployment rate also fell from 8.5% to 8.3%. The workweek edged down to 34.7 hours from 34.8 hours. Average hourly earnings rose 0.4% for the month, down from 0.6% the previous month, but up 4.9% year-on-year, from 4.6% previously.
Growth details: for Q3, non-farm productivity fell 5% compared to a 2.4% in Q2, with unit labour costs soaring 8.3%, up from 1.1% previously, reinforcing inflation concerns.
Solid surveys for all sectors
Surveys: the Markit manufacturing PMI was almost unchanged at 57.8 vs. 57.7. The Markit/CIPS services PMI was much stronger, at 59.1 vs. 58.0. The construction PMI was also better at 54.6 vs. 52.6.
Housing: the Nationwide House Price index rose 0.7% for October or 9.9% year-on-year. The Halifax house price index increased 0.9% in October, or 8.1% year-on-year, the fastest annual gain since June to an average of £270,000 per property.
Unchanged surveys at high levels, but worrying producer prices
Surveys: the eurozone manufacturing PMI eased slightly from 58.5 to 58.3. The eurozone services PMI was almost unchanged at 54.6 vs. 54.7.
Employment: the unemployment rate in the eurozone fell from 7.5% to 7.4% in September.
Inflation: the eurozone PPI surged 2.7% in September, bringing the year-on-year increase to a massive 16.0%, up from 13.4%.
Chinese economy still holding up
China: the Caixin China Services PMI rose from 53.4 to 53.8, belying concerns that the Chinese economy is in decline. The October trade surplus hit a record, as exports rose 27.1% whilst imports increased only 20.6%, bumping up foreign exchange reserves from US$3.2trn to US$3.217trn.
Japan: the monetary base grew by 9.9% year-on-year in October, down from 11.7% the previous month. Household spending fell 1.9% year-on-year in September, up from -3% the previous month.
Crude oil cartel OPEC disappointed energy markets and oil prices fell sharply. They agreed to add 400,000 bbl (barrels)/day of crude in December, as promised, rebuffing calls by President Biden for a higher output addition.
Gold prices staged a rally above the US$1,800 on lower government bond yields.