International Communique No. 311 – 19th October 2021


Fears about rising sovereign yields and runaway oil prices were soothed last week by September US retail sales and quarterly earnings reports from banks and healthcare groups. Both showed positive outcomes than estimates, with US retail sales up 0.7% when a downturn was expected. Despite the pressure on the US 10-year yield, which edged up further to 1.6%, this news powered an upturn in leading equity indices. Strength in corporate earnings is seen as crucial because the higher long-term yields have stoked concerns about the lofty price/earnings ratios exhibited by equities. Despite red-hot inflation and the prospect of the Fed tapering, the S&P 500 has risen 3% since the beginning of October and now sits a narrow 1.5% below its all-time high, while MSCI’s global equity index has recovered 2.3%.

Rising fuel prices combined with the soaring cost of transporting goods, including the surplus demand for ocean freight that in turn has driven up container prices, has shifted the focus to supply chains. Making matters worse, more and more headlines feature the word ‘stagflation’. The global economy is slowing down relative to preceding quarters. But this is all still a far cry from the stagflation of the 1970s, when GDP growth tanked at the same time as consumer price indices were shooting upwards. Back then, unemployment was sky high and inflation in some places exceeded 10%.

Chinese GDP disappointed in the third quarter, rising by only 4.9% on an annualised basis – its slowest score this year. It also marks a precipitous decline relative to the 7.9% achieved in the second quarter. In short, the economic recovery is less robust than expected. This slowdown is due in particular to government controls to limit energy use and reduce the financial risks associated with highly leveraged property developments. Production output has also slowed down due to shortages of chips and other components. Notably, steel production tumbled by over 20%, while retail sales rose by 4.4%. The power shortages may persist for some time, but disruptions to supply chains are likely to ease.

The property market is beginning to feel the effects of Beijing’s crackdown, as demand ebbs and fewer new projects are being undertaken. The number of new builds contracted by 4.5% between January and September. In contrast, property investment increased by 8.8% over the same period.

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