Market and Economic review for week ending 8 October 2021
Within the LF Prudential Risk Managed Active and LF Prudential Risk Managed Passive portfolios the portfolio manager remains neutral in equities and fixed income, while maintaining a diversifying overweight to alternatives.
Market and Economic review
It was a choppy week for markets as investors weighed up the impacts of global supply chain constraints, continued rising prices, a softening in global economic growth rates and political stand-offs with an increase in labour demand, uncertain growth prospects, and a fall in COVID-19 infections and hospitalisations. The additional variable of an uncertain political landscape in the US and Europe, with the potential for a historic US default on $28.4tn of debt and Germany searching to form a cohesive government at the end of Angela Merkel’s reign, has served to increase uncertainty for the outlook.
The S&P 500 (+0.98%), FTSE 100 (+0.76%) and Eurostoxx (+1.26%) all made gains week-on-week, despite having more down days than up. Government bond yields rose sharply, as central banks outlined plans to pull back the support provided through the pandemic and to get a grip on rising inflation. 10-year Treasury yields rose 13.3bps to 1.59% this week, while UK 10-year Gilt yields rose 12.3bps to 1.13%. Global manufacturing activity has been hit by supply chain bottlenecks and escalating costs of production, exacerbated by pandemic-induced factory shutdowns in Asia and signs of slowing growth in China. This was evidenced at the beginning of the week in manufacturing PMI data. Despite most economies remaining in expansionary territory, the rate of growth slowed. The Eurozone PMI fell to 58.6 in September, down from 61.4 in August while Japan fell to 51.5 from 52.7 in the previous month and the UK recorded its 4th consecutive monthly decrease, retreating from 60.3 in August to 57.1 for September.
Specific to the UK and mainland Europe, the logistical issues, supply shortages and a labour crunch in key industries are unlikely to be resolved quickly and may persist into 2022, which could continue to keep inflationary pressures high. The IMF released revised economic forecasts this week, indicating that global economic growth for 2021 was likely to fall slightly short of its July forecast of 6%, citing the risks associated with global government debt levels, inflation, and divergent economic trends in the wake of the pandemic. Particular reference was made to “the Great Vaccination Divide” that has left many of the less wealthy countries with too little access to vaccines.
While the US and China remain the key drivers of global growth and momentum in Europe appears to be picking up, growth prospects have worsened elsewhere. Staying with US growth; new orders for US-made goods accelerated in August; as factory orders increased. This was supported by a strong print for Services activity, as the ISM non-manufacturing survey reported an increase to 61.9 for September, up from 61.7 the previous month. US labour market data also surprised to the upside, with benefit claims falling 38,000 this week to 326,000 and private payrolls increasing by 568,000 jobs last month, beating expectations of a 428,000 gain.
US President Joe Biden battled in the Senate this week to avoid a historic default on the US’s $28.4tn of debt, accusing Republicans of taking a “reckless” position as the deadline to raise the debt ceiling drew closer. Biden’s argument that “raising the debt limit comes down to paying what we already owe…not anything new”. Top Republican, Mitch McConnell, is credited as having found a resolution to delay the deadline to December and allow for an uplift of $480m to the Treasury Department’s borrowing authority, in a narrowly-won Senate vote. A vote in the House of Representatives is expected on Sunday following a debate on the proposal. Moody’s rating agency have maintained a Stable outlook on the United States Aaa rating, reflecting its view that the debt limit would be raised and the Treasury would therefore continue to meet its debt service obligations in full and on time.
Across the pond inflation was at the core of discussions, as it has been for some time. The new Bank of England Chief Economist, Huw Pill, set out his relatively hawkish position. He noted that the size and duration of the recent jump inflation has proved greater than expected but flagged that interest rates were likely to remain relatively low compared to history in the coming years, rationalising that the base effects from the pandemic and a normalisation of the global supply chain should naturally ease inflationary pressures. In Europe, two leading economists at the European Central Bank (ECB) were at odds over the persistence of European inflation. Both Phillip Lane and Isabel Schnabel repeated the ECB’s official line that the spike in price growth would ease next year, however their views differed on the risks surrounding that prediction, as Schnabel warned of more persistent inflationary pressures, while Lane argued in favour of forces that could drag down price growth.
In commodities, it was an especially volatile week for oil. US crude gained 4.88% this week, jumping to its highest level since 2014 on Tuesday after the OPEC+ group of producers stuck to its planned output increase rather than increasing it. Price volatility was driven by an unexpected rise in US crude inventories, before the price once again rebounded as the consensus view that it was unlikely the US would release emergency crude reserves or ban exports to ease tight supplies. Looking ahead, investors will be keenly awaiting the release of US Non-Farm payrolls this Friday afternoon, while we also await US and UK unemployment data next week, alongside UK GDP and Chinese inflation data.
We continue to weigh the prospects for risk assets, which face conflicting factors including a softening of global growth rates, and the reaction of central banks’ to their assessment of stickiness of elevated inflation rates.
A key question that remains is whether in the face of softer growth, central banks will have the desire and the inflation leeway to continue with stimulus rather than to take steps to unwind it. The recent rise in government bond yields suggests that markets expect monetary policy to tighten sooner rather than later, but after a number of false dawns in recent history, investors will continue to pay attention to the volatile macro landscape for insights into the state of the global economy and to determine the actions that central banks are likely to take.