Markets last week 11/10/2021

Markets last week

The week witnessed considerable volatility in equity and bond markets alike. Bond yields rose sharply as a combination of improved economic expectations, falling COVID-19 infections and a short-term resolution of the US debt ceiling impasse helped risk markets rally from the corrective phase. The week was also rich in news items, such as the Congressional hearing of the Facebook whistleblower, which weighed on US social media shares, soaring natural gas prices partly reversed by the verbal intervention of Russian President Putin, and another Chinese property company nearing default on its obligations.

Inflation was still top of the mind for investors, with UK inflation expectations for 10 years topping 4% for the first time since 2008. UK house prices in September rose at the fastest pace in 14 years.

Economic data were generally supportive, with services PMIs rising in the US and China showing that consumers are not pulling in their horns despite supply shortfalls in many products. The miss on US non-farm payrolls on Friday was not as bad as the headline, when digging into the details. Nevertheless, Q3 growth estimates were downgraded during the month, with the widely followed Atlanta Fed growth forecast dropping from 3.6% to 1.3%, although the expectations for Q4 are generally showing a rebound.

Government bond yields surged again and, in the US, the 2-10-year yield curve steepened to 130 bps from 120 bps, indicating a resumption of growth. Comments from Bank of England Monetary Policy Committee members seemed to indicate higher interest rates sooner rather than later.

Oil prices once again were in the spotlight, with Brent oil rising 4%, making energy the best-performing equity sector over the week, up almost 5%. Other strong sectors were financials, utilities and materials, and the FTSE 100 was one of the best markets, with Japan lagging after being the best performer in Q3. In the run-up to the general election, the new Prime Minister Fumio Kishida hinted at a possible capital gains tax, which spooked markets, despite positive hopes on the government’s additional economic package.

The week ahead

Tuesday: UK employment data (September claims and August ILO employment data)

Our thoughts: UK employment is crucial to the Bank of England’s future monetary policy. As inflation is reaching unexpected levels, what is likely to tip the balance one way or another for a potential rise in interest rates, is how the furloughed employees fare in the employment market. If the vast majority of them are immediately re-employed, then the MPC (Monetary Policy Committee) will be more minded to raise rates to deal with the current surge in consumer prices. If unemployment increases significantly as the end of the furlough scheme fails to lead to re-hiring, the MPC could tread more carefully in the next few months.

Tuesday: ZEW survey for eurozone and Germany

Our thoughts: the ZEW survey is widely followed in Europe, not just for the eurozone, but also for its German survey. Expectations and current situation are both forecast to fall moderately for Germany, but no estimates are currently provided for the eurozone expectations component. The magnitude of the slowdown will be meaningful for market confidence at a time when growth may well recover from its slowdown but confirming data are still lacking.

Wednesday: US CPI

Our thoughts: inflation is exercising markets right now, with no sign that supply chain issues are nearer to being resolved, with hints that wages and salaries are poised for additional rises and with concerns that what may have looked temporary at the beginning may become self-fulfilling and widespread. Whereas every country has different inflation dynamics, it is US inflation that matters for markets, with the CPI (consumer price index) at the top of investors’ minds. Are the same items continuing to put pressure on prices, namely the reopening plays and the bottleneck-hit areas, or are other goods and services starting to get infected by higher inflation? Currently, estimates call for 5.3% CPI and 4.0% core CPI (ex food and energy), unchanged from the previous month. Any deviation from these expectations will be scrutinised carefully.

Markets for the week

The US debt ceiling issue is postponed until December and the Bank of England is starting to signal higher rates

In the US congressional stand-off for the debt ceiling, the Senate minority leader Mitch McConnell made an offer to Senate Democrats to raise the debt ceiling until year-end, which eased the fiscal impasse. Lifting the debt ceiling will allow more treasury bond issues which will increase supply. This could well happen at the same time as the US Federal Reserve (Fed) is tapering its asset purchases, which could create a different supply-demand dynamic within the government bond market.

In the UK, Michael Saunders, a member of the Bank of England’s (BoE) Monetary Policy Committee (MPC), one of the two MPC members who voted last month to end the BoE’s asset purchases, said he was concerned that capacity pressures and higher pay growth are driving an inflation pick-up that “could become more persistent unless monetary policy responds. I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously”.

United States

Stronger services surveys should trump weak payroll numbers

Surveys: the ISM (Institute for Supply Management) services PMI edged up 0.2 to 61.9, against expectations of a decline, with improvements in overall business activity, new orders, backlogs, and prices rebounding (nearly 60% of respondents reported higher prices). 17 out of 18 industries reported growth and 14 out of 18 pointed to an increase in employment compared with August, up from nine the prior month.

Trade and industry: the US trade deficit worsened by US$3bn to US$73.3bn in August, due to soaring imports even though exports were also rising. Factory orders rose 1.2% in August and 18.0% year-on-year. Non-durable goods orders also increased 0.6% and durable goods 1.8%.

Housing and credit: MBA mortgage applications fell 6.9% on the week, now down 14.9% year-on-year. The mortgage rate is up to 3.14%, the highest level since July. US consumer credit fell from US$17.3bn to US$14.4bn in August.

Employment: initial jobless claims fell by 38k to 326k, from an upwardly revised 364k. Continuing claims fell another 97K to 2.714 million. Challenger, Gray & Christmas reported hiring plans of 939,790, the highest increase on record, turning positive year-on-year from -41.4% the previous month. Announced layoffs increased by just 2,172 to 17,895, down 84.9% year-on-year.

Non-farm payrolls missed half-a-million estimates and posted only 194K new jobs in September. The revision to August was +131K and over 2 months +169K. The unemployment rate (U-3) fell from 5.2% to 4.8% but the participation rate reduced from 61.7% to 61.6%. The underemployment rate (U-6) fell from 8.8% to 8.5%. Average hourly earnings jumped from 0.4% to 0.6% and from 4.0% to 4.6% year-on-year. The average weekly hours increased from 34.6 to 34.8. The main areas of disappointment in the report were leisure & hospitality, as well as local government education. The household survey continued to highlight labour supply issues.

United Kingdom

Booming housing sector vs. depressed autos

Auto sector: new car registrations saw their weakest September since 1998 due to a shortage of computer chips. Carmakers sold about 214,000 units last month, 35% lower than a year earlier. Interestingly, September was the best ever month for electric-vehicle sales, highlighting the different speeds of the car market as the UK is expected to ban fossil fuel powered cars by 2030.

Surveys: the Markit/CIPS UK construction PMI fell from 55.2 to 52.6, below estimates.

Housing: UK house prices increased in September at the fastest pace in more than 14 years, according to Halifax. The average price of a home rose 1.7% to £267,587 following a 0.8% gain in August. The increase was the largest since February 2007 and pushed up the annual pace of growth to 7.4%.

Europe

Surveys still healthy even if German industry is starting to smart from the supply chains

Surveys: in the eurozone, the Sentix investor confidence index fell from 19.6 to 16.9, below estimates. The eurozone services PMI edged up from 56.3 to 56.4.

Inflation: the eurozone PPI (producer price index) was up 1.1% in August to 13.4% year-on-year, led by energy up 2%, followed by intermediate goods.

Industry: German factory orders plunged in August by 7.7%. German industrial production fell 4% in August, clipping the year-on-year growth to 1.7% from 6% the previous month. German exports fell 1.2% in August amid the supply crunch, whereas imports rose 3.5%.

Sales: eurozone sales volume increased 0.3% in August, being flat year-on-year.

China/India/Japan/Asia

Recovering Chinese services and buoyant Japanese survey

China: foreign reserves were almost unchanged at US$3.2trn. The unofficial Caixin services PMI rallied sharply from 47.2 to 51.4 in line with the official CFLP non-manufacturing PMI which also went from 47.5 to 53.2 last week.

Japan: the services PMI was higher at 47.8 vs. 47.4, but still showing contraction. The leading index and the coincident index both fell but were close to estimates. Unlike these surveys, the Japanese Eco Watchers surveys soared, with the current situation rising from 34.7 to 42.1 and the outlook from 43.7 to 56.6, the highest since 2013. Machine tool orders rose 71.9% year-on-year, down from 85.2% the previous month.

Oil/Commodities/Emerging Markets

OPEC+ agreed to maintain its schedule of gradual monthly production increases, triggering a further surge in crude prices. Ministers ratified the 400,000 barrel-a-day supply hike scheduled for November. There had been speculation that they could opt for a larger supply increase, but no such proposal was made.  Brent and WTI are trading at a 7-year high.