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    Weekly multi-asset update: October

    Weekly multi-asset update: September

    22 October 2021 Multi-asset
    Week to 22 October, 2021


    • Inflationary pressure adding to rates hike expectations in the UK; Bank of England could hike as early as November
    • Global uptick in COVID-19 cases starting to come back into focus
    • Earnings season continues to beat expectations, US consumer demand appears strong
    • Outlook: Next round of central bank decisions, UK budget announcement, further earnings announcements

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    Weekly review

    Inflationary pressure adding to rate hike expectations in the UK; Bank of England could hike as early as November

    The impact of inflationary pressures upon central bank policy remains a key focus for markets. Last weekend this pressure was reflected in central bank guidance with Bank of England Governor Bailey stating that inflation “will last longer” and may start feeding into inflation expectations and therefore “we will have to act”. The Bank of England may even raise rates in November, before their final gilt purchase (not reinvestment) under the Asset Purchase Facility (QE) in mid-December. This hawkish tone led to global yields rising initially before more two-way volatility returned. Markets are now pricing in a policy rate of c.0.45% by the December meeting (from 0.1%), and up to around 0.95% by the June 2022 meeting. Ultimately, central banks are largely hostage to events; if inflation remains stubbornly high, they may have to become more hawkish as 2022 progresses. 

    Given the focus on the UK, the CPI print for September was closely watched; coming in slightly beneath expectations at 3.1% (vs. 3.2% expected), whilst core CPI also fell to 2.9% (vs. 3.0% expected). The pressure remains for higher prints as base effects continue to flow through into Q1 2022, maintaining pressure on the Bank of England. We also had the CPI release from Canada for September, which rose to 4.4% (vs. 4.3% expected), which is its highest reading since February 2003. Commodity prices continued to rise over the week, further supporting the narrative of ongoing inflationary pressure.

    In other central bank news, it was announced this week that Bundesbank President Weidmann would be stepping down on December 31, leaving his position after just over a decade, and it will be up to the next government to decide on the new appointment.

    Global uptick in COVID-19 cases

    Turning to the pandemic, COVID-19 has gradually returned onto the market radar, with the number of global cases on the rise once again. At the beginning of the week, we saw China dealing with a new cluster in its north-western provinces, with further positive tests reported, as well as a record 94 cases reported in Auckland, New Zealand despite their continued lockdown. As we approach winter in the northern hemisphere, we are set to face a more severe flu season, with the Walgreens Boots Alliance reporting that flu cases are 23% higher in the US relative to a year ago. In the wake of this, across the week we have seen several countries tightening up restrictions; including a mandatory mask-wearing policy indoors in the Czech Republic, and a compulsory vaccination mandate for all municipal workers in New York.  In the UK there were over 50k new cases reported for the first time since mid-July. However, with confirmation from Pfizer and BioNTech that their booster shot was 95.6% effective against symptomatic COVID-19 in a trial of over 10,000 people, the battle to contain cases and limit restrictions as we enter the winter months continues. A return to lockdown measures more broadly is a key risk to the ongoing economic recovery and relative financial market stability.

    Earnings season continues to beat expectations, US consumer demand appears strong

    Corporate earnings remained a key focal point for markets this week in both the US and Europe. For the S&P 500, the headline growth rate now stands at +28% year-on-year. That represents a beat of 3% on pre-season expectations which is much more modest than the outsized beats we’ve seen in recent quarters. That said, only 15% of market capitalisation has reported and a large portion of the beat can be explained by bank earnings we discussed last week. One of our key watch factors within the earnings season is share price reaction to both beats and misses. Thus far, the reactions have been muted but ‘healthy’, with beats being rewarded +1% and misses punished -1%. Another key area of focus is management commentary and guidance, particularly around the ongoing disruption to global supply chains. On that front we should get more colour next week when the vast majority of multinational firms report. The results so far in the US have been more domestically focused and commentary on consumer demand has been very positive.

    Outlook: Next round of central bank decisions, UK budget announcement, further earnings announcements

    Next week will see the next round of central bank decisions starting with the European Central Bank (ECB) and the Bank of Japan, followed by the Federal Reserve (Fed) and the Bank of England (BoE) the week after. However, market anticipation is higher for the latter two, with expectations of a tapering announcement from the Fed, whilst the BoE’s chief economist stating that they will have a “live” decision on whether to hike rates. The ECB is set to be tamer with this Governing Council meeting likely to be a ‘staging ground’ ahead of wide-ranging policy decisions in December. Next week’s meeting will therefore be about tone and expectations management. Nonetheless, something of interest will be what is said about the recent surge in natural gas prices, as well as if ECB President Lagarde challenges the market pricing on lift off as inconsistent with their inflation forecasts and new rates guidance.

    The UK government will also be announcing their latest budget and spending review, which will cover public spending priorities over the next three years. Current predictions centre around the expected downward revision in 2021-22 borrowing by £60bn, and Chancellor Sunak’s outline of the new fiscal rules.

    In addition, the Q3 earnings season will ramp up further, with 165 companies in the S&P 500 reporting, including Microsoft, Alphabet, Facebook, Apple and Amazon. COVID-19 will remain in the headlines in light of the growing number of cases across the world, and we will get the first look at Q3 GDP growth in the US and the Euro Area.

    Week to 15 October, 2021


    • US CPI was benign but Federal Open Market Committee (FOMC) September minutes could mean a November taper is likely
    • Earnings season starts strongly with several banks reporting
    • China headwinds continue as PPI soars and further issues come to the fore in the property sector
    • Outlook: China GDP data, earnings season continues, and several central bank speakers

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    Weekly review

    US CPI was benign but FOMC September minutes could mean a November taper is likely

    At face value, the US Consumer Price Index (CPI) print on Wednesday was fairly benign. September CPI rose +0.4% vs (+0.3% expected) while core CPI was in line with expectations at +0.2%. However, under the surface there were some worrying moves. For example, rent grew at its fastest pace in 15 years (+0.44%). The risks of this have been in the background for a while, with faster wage growth and a huge increase in property values increasing the rent expectations of landlords. This rise was offset by a number of falling markets that peaked over summer, with airline fares, lodging, and used car prices all dropping. These are poised for a comeback too as airline prices, which were depressed by a lack of activity during Delta lockdowns, are likely to climb. Furthermore, the ongoing chip shortage may well push frustrated buyers towards the second-hand car market.

    Other inflationary pressures continued to mount during the week, as oil (WTI) surpassed $80/barrel for the first time since 2014. Freight container costs continue to remain near all-time highs while the Bloomberg Commodity Spot Index hit a fresh peak in the COVID era. Reflecting this news, Wednesday saw the biggest rise in the gold price since March while the US dollar softened throughout the week. Finally, following the release of the FOMC’s September meeting minutes, it is now widely considered that a November taper is likely.

    China's headwinds continue as PPI soars and further issues come to the fore in the property sector

    On Thursday it was revealed that China’s Producer Price Index (PPI) reached its highest point since 1995, coming in at +10.7% (vs 9.5% in August). CPI slowed from August (+0.7% vs +0.8%) but this did little to hide the fact that consumers are simply yet to feel the full impact of the recent energy shortages that have pushed prices so high. Furthermore, some of the effects were offset by deflationary food prices which account for around 20% of CPI and so it remains under control and well under the 3% target. Hence, there is no expectation for intervention from the People’s Bank of China and producers will have to weather the margin squeeze.

    Worries continue to remain over the outlook of China’s growth. The property sector is an ongoing issue with another developer, Modern Land, asking to delay a bond payment to the value of $250m due on 25 October. It is estimated that China’s housing market has debt payment requirements of $2.9bn by December. In response, authorities have eased home loan restrictions, speeding up the rate of mortgage approvals and once again allowing banks to sell residential mortgage-backed securities after a ban was introduced earlier this year. Additionally, the central bank released a statement reassuring the public that the Evergrande crisis is under control and the resolution will be based on “market-oriented and rule-of-law principles”.

    Earnings season starts strongly with several banks reporting

    The week saw a number of big banks release their earnings reports, with JP Morgan Chase, Morgan Stanley, Citibank and Wells Fargo beating expectations. The two key drivers have been record levels of M&A activity and freed cash from anticipated overdue loans. Morgan Stanley’s investment banking division saw a 67% revenue increase which pulled in $2.85bn in Q3. Similarly, JP Morgan’s investment banking arm posted its best quarter ever.

    Outlook: China GDP data, earnings season continues, central bank speakers

    The week will begin with a key data point as China releases its Q3 GDP. This will give an insight into the extent of the troubles it is currently facing and what to expect for the rest of the year.

    After the banks made a strong start to the earnings season, a further 78 constituents of the S&P 500 will release their quarterly reports next week. The markets have been quick to punish companies for missing expectations and investors will be looking to avoid the landmines. Notable names include Johnson & Johnson, Procter & Gamble, and Netflix on Tuesday; Tesla and Verizon on Wednesday; and AT&T and Intel on Thursday.

    After a lot of central bank activity recently, next week is a touch quieter. We will hear from Bank of England Governor Bailey on Saturday and Sunday, and from European Central Bank President Lagarde on Saturday. Also, Turkey’s central bank will make a monetary policy decision on Thursday, their first since cutting rates by 100 basis points. Notably, the only person in the committee to oppose the decision to cut was fired during the week, paving the way for further rate decreases.

    Week to 8 October, 2021


    • Global activity data mixed; continued signs of moderation in the pace of economic growth
    • Russia steps in with gas supply offer; Nord Stream 2 in focus
    • Central bank conundrum - inflationary pressures amidst slowing growth
    • Outlook: Inflation data, earnings season begins, IMF and World Bank annual meeting

    Responsible investment in multi-asset

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    Weekly review

    Global activity data mixed; continued signs of moderation in the pack of economic growth

    The Purchasing Manager Indices (PMI) released throughout the week illustrated that in some countries the pace of growth is slowing, not least because of ongoing supply chain pressures and higher energy prices. Highlighting the moderation in the pace of growth saw the US composite PMI hit its lowest level this year while Eurozone manufacturing fell for its third straight month; importantly, both remain in expansionary territory. Turning to the US labour market, September’s non-farm payrolls came in well below expectations for the second month running and grew by even less than in August. Actual figures were +194k (vs +500k expected and +235k in August), which means the unemployment rate now sits at 4.8%. Notably, labour force participation rate fell -0.1% which equates to approximately 183k people and explains why the unemployment rate came in lower than expected. The August release was revised upwards by c.90k.

    There were some relatively brighter spots, as global PMIs saw a small improvement relative to August and remained in the expansionary phase (over 50). The UK bucked the trend, with composite, manufacturing, and services PMIs all beating expectations with readings of 54.9 vs 54.1, 57.1 vs 56.3, and 55.4 vs 54.6, respectively. US consumers continued to spend during September, with the ISM services figure coming in at 61.9 (vs 59.9 expected and 61.7 in August). Finally, the onset of the latest company earnings season will provide a useful bottom-up view on how corporate margins are faring amidst a potential moderation of growth and demand, rising input costs and higher wage pressures.

    Russia steps in with gas supply offer; Nord Stream 2 in focus

    Energy prices have remained at the forefront of headlines this week.  On Wednesday, Russian President Putin stated that Russia could provide a record amount of gas to Europe in order to fulfil the current supply shortages and stabilise high energy prices. In his speech Putin pointed to the shift to more environmentally friendly energy production and the policy switch from long-term contracts to spot gas sales as catalysts to the soaring in energy prices. UK gas futures, for example, were up a staggering 723% in 2021 (to a record high) prior to Putin’s comments; they have since fallen by over 40%. Putin also mentioned that the current route for transporting gas to Europe, which involves transit via Poland and Ukraine, would be “economically unprofitable for Gazprom”.

    Deputy Prime Minister Alexander Novak subsequently highlighted the role that the Nord Stream 2 pipeline could play in helping fill the demand requirements. Nord Stream 2 is the contentious new link between Germany and Russia that is ready for use but is awaiting regulatory approval before it can start. The process involved in approving the opening of the pipeline is set to be long and highly politicised and many see this as Russia’s attempt to open the taps as soon as possible.

    Central bank conundrum - inflationary pressures amidst slowing growth

    Central banks are facing some tough decisions over tightening monetary policy amid challenging recovery period and growing inflationary worries. Although many continue to repeat the line that inflation will be transitory, the exact definition remains loose as inflation forecasts are repeatedly increased. The UK retail price index, for instance, could potentially hit 7% in early 2022. Energy prices remain at extreme highs (even after stabilising somewhat) and supply chain pressures continue to persist. This has now passed into food prices, with the UN’s world food prices index at its third highest level since inception. Markets have, in some cases, dragged policy makers to the table and forced rates to be raised. Poland hiked 45 basis points on Wednesday, following on from the Czech Republic largest rate hike in 24 years (75bps) and the rise by the Norges Bank last week.

    Huw Pill, the Bank of England’s new chief economist, appeared to take a more hawkish stance during his first public speech on Thursday. He stated that “the balance of risks is currently shifting towards great concerns about the inflation outlook,” and went on to predict current inflation levels will be long lasting. He still defined the period as transient though, just at a greater magnitude and duration than initially expected.

    Outlook: Inflation data, earnings season begins, IMF and World Bank annual meeting

    Next week will see the last US CPI release before the US Federal Reserve meet again in November, as well as the minutes from their September meeting that may shed more light upon their discussions around the timing and speed of the tapering of asset purchases. The JOLTS job openings release in the US will also provide additional context on the labour market following the below consensus non-farm payroll release. The IMF/World Bank annual meetings may also provide a number of policymakers to provide comment on recent economic and market events. The IMF will also release their latest World Economic Outlook document. From a bottom-up perspective we also see the start of the US corporate earnings season, with high profile companies such as JP Morgan, Bank of America, Walgreens Boots Alliance, and Goldman Sachs all due to report.

    Week to 1 October, 2021


    • Federal Reserve (Fed) Chairman Jerome Powell expects more persistent inflation; the infrastructure bill is delayed
    • Downgrades to China’s growth amid energy crunch, but some resilience in retail services
    • Further pressure on the UK economy as HGV driver shortage leads to petrol panic buying
    • Outlook: US jobs report, global PMIs and one week closer to the US debt ceiling deadline

    Responsible investment in multi-asset

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    Weekly review

    Federal Reserve Chairman Jerome Powell expects more persistent inflation, and the infrastructure bill is delayed

    In testimony before Congress, Powell indicated he believes current inflationary pressures – namely, higher commodity prices, supply chain bottlenecks and rising wage demands – could be stickier than previously estimated. The central bank has duly increased its inflation forecast for 2021 to 4.2%, more than double its long-term target. This view was reinforced by the St. Louis Federal Reserve Governor James Bullard who called for two interest rate hikes in 2022.

    An increase in anticipated rate hikes resulted in the 10-year Treasury yield rising above 1.55% during the week, its highest level since June, which, alongside increasing concerns around the growth backdrop, was sufficient to trigger an equity sell off. Tuesday saw the S&P 500 (-2.04%) have its worst one day move since May while the tech heavy NASDAQ fell -2.83%. On Thursday further sell-offs saw the S&P 500 close 5% below its recent high for the first time in 11 months.

    There is further uncertainty over whether the government will pass the $550bn bipartisan infrastructure bill, with Speaker Nancy Pelosi delaying Thursday’s vote on concerns that Democratic support was not strong enough. Furthermore, the US Treasury is now only two weeks from defaulting with Republicans unwilling to raise the debt ceiling, arguing that government spending has been unnecessarily high. The most likely result remains passing it through the budget reconciliation and bypassing the need for Republican support.

    Downgrades to China’s growth amid energy crunch, some resilience in retail services

    Chinese energy producers are not only feeling the effect of a nationwide push for decarbonisation, but are also hit by high commodity prices and unprofitable power generators that lack production incentives. Subsequently, growth forecasts have been further downgraded as many see this as a larger problem for production than the recent delta outbreaks. China’s production industry has played a key role in their post-pandemic recovery however, on Thursday, manufacturing PMI came in below 50 for the first time since peak COVID-19 restrictions were imposed in February 2020 (49.6 vs 50.1 in August). This, combined with priority to energy access being given to homes, accentuates the current problems facing the supply side.

    In fact, the wider economy is facing serious headwinds as it deals with the spill over effects of a struggling real estate sector. Some resilience is being shown with an upward surprise to the non-manufacturing PMI (53.2 vs. 49.8 expected), which was driven by strong retail services activity which offset falling construction numbers. Additionally, the People’s Bank of China has continued to inject liquidity ahead of the week-long Chinese National Day Holiday starting today.

    Further pressure on the UK economy as HGV driver shortage leads to petrol panic buying

    A fuel shortage crisis has emerged in the UK following a lack of available tanker drivers and worsened by panic buyers emptying the remaining gas stations. A survey by the Petrol Retailers Association estimated that, at its worst, 66% of stations were dry. By Wednesday this figure was down to 27% with a further 21% having only one grade in stock. Oil companies have stated that the level of petrol at refineries and terminals remains normal and the shortage is only due to a lack drivers. There are two key reasons behind the approximate 100,000-person shortage. Firstly, tighter post-Brexit immigration laws make it even harder for drivers to enter the UK and secondly, the pandemic has delayed the issue of new HGV licenses. The result is further stress on the recovering economy and higher inflationary pressures.

    Outlook: US jobs report, global PMIs and one week closer to the US debt ceiling deadline

    As we move into the fourth quarter, there will be plenty of events to keep markets busy. The US jobs report towards the end of the week will be a focal point, especially as it’s the last print before the Federal Reserve’s next policy decision in early November. Last month’s report saw nonfarm payrolls growing by just +235k, the slowest increase since the beginning of the year. Elsewhere on the data front, global services and composite PMIs will be out on Tuesday, which will give an indication of how the economy performed towards the back end of the third quarter.

    Focus will likely also be on the US as they move closer to the debt ceiling deadline, whilst Congress continues to grapple with the $550bn infrastructure bill and $3.5tn reconciliation package.

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