International Communique No. 308 – 5th October 2021


In September, all market sectors except oil & gas were down sharply as higher inflation, plus expectations of Fed plans to scale back asset purchases as early as November, together weighed on sentiment. Signs of slower economic growth in China and political ructions in Washington did nothing to help matters.

The stalemate in Congress over federal government funding, with different sides disagreeing over the increased debt ceiling and the size of the infrastructure plan, has lit a fire under long-term yields. The sheer speed of the upswing shows that the pendulum has swung from capital appreciation to protecting gains. The latest surveys showing the level of bullish viewpoints plunging to 23 while bearish opinions have soared to a score of 40. A scenario of persistent inflation is gaining ground, which is sparking volatility in the prices of financial assets, themselves seemingly at the mercy of the slightest uptick or downtick in bond prices. As we head into the fourth quarter, profit outlook as well as employment perspectives are adding to the chill in the air. US job creation for September, is expected at 470,000. After the upset in August, this figure will be key to determining the Fed’s next move, considering that part of its mandate is also to achieve full employment.

A critical question would be whether the cascade of price increases is a one-off occurrence, stoked by pent-up demand, in which case the damage could be limited by adopting less accommodating monetary policies. But, if the inflation is more ingrained, that would be out of the question. Higher input costs are unsettling many investors, aware that this also makes central banks more jittery and consumers more hesitant. Supply chains most likely need to be strengthened to limit disruptions, which will require capital expenditure. But only so much can be done to meet the brisk demand, both now and in the longer term.

In China, the world’s manufacturing heartland, rising energy prices (as it curtails the use of coal to reduce emissions) and power cuts have forced factories to curb production output. In September, the manufacturing PMI slipped below the 50-spot marking the start of expansion territory. By contrast, the services PMI recovered after some Covid-related restrictions had been lifted. Last week the authorities asked banks to support the housing market by facilitating mortgages, signalling that they are concerned about the woes experienced by Evergrande – which has defaulted on some interest payments – spreading to other entities. Fears that Beijing could allow GDP growth to slow down even more as it overhauls the structure of its economy are making investors all the more nervous.

In the US, the manufacturing PMI rose to 61.1, driven by a high backlog of orders. However, delivery times are becoming significantly longer.

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