International Communique No. 313 – 3rd November 2021


October largely offset September’s drawdown as many stocks swung back to soldier on to new record highs. The tech-heavy Nasdaq jumped 7.5% to its highest all-time reading, and the pattern is similar for other equity markets. Profitability stands at an all-time high among US corporations while mass buyback programmes are expected to continue supporting share prices. Towards the end of the week, Apple and Amazon had disappointing results – hit respectively by supply bottlenecks and labour costs – and cautious forecasts. More than 80% of the S&P 500 companies that have reported, have topped consensus forecasts. Although figures have shown signs of rising energy prices and hiring difficulties starting to weigh on margins.

Equity markets are off to a firm start this month, helped by the outcome of legislative elections held in Japan. Despite losing seats, the current ruling coalition made up of Liberal Democratic Party and the Komei Party has retained its majority, marking a vote of confidence in the government run by PM Fumio Kishida.

From the Fed’s meeting, the market is expecting news that it will taper purchases of ordinary and mortgage-backed bonds. The tone adopted regarding the fleetingness of inflation will also be crucial. According to futures markets, two 25bp increases in short-term rates are in the works for 2022. Meanwhile the US yield curve is flattening as 30- and 10-year rates decline and 2-year rates head upwards. While lower long-term yields are generally seen as positive for risk assets, the relationship is more complicated in the current setting, in which inflation fears are mingling with signs of slowing economic growth. Just look at US GDP, which grew by only 2% in the third quarter on an annualised basis – the slowest performance this year. The sharp slowdown relative to the 6.7% chalked up in the second quarter was due in particular to less spending on durable goods, which is estimated to have shaved 2.7 points from economic growth.

Across in Europe, GDP grew by 2.2% in the third quarter while the inflation quickened to 4.1%, twice the ECB’s official target.

The end of ‘peak monetary stimulus’ among major central banks may coincide with a less dynamic rate of economic expansion.

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