Although equity markets were once again wobbly on Monday, the confluence of neutral-to slightly favourable macroeconomic data and a solid start to the earnings season stabilised and then provided fuel for a solid performance for the reminder of the week.
As far as macroeconomic data, let’s start with the U.K. August GDP grew 0.4% in the U.K. in August according to data released by the Office of National Statistics (link here), reversing a 0.1% decline (revised) in July. Although the IMF expects the U.K. to have the fastest growth of any major economy in 2020 (at 6.8%), the country was also the worst affected by the pandemic – the U.K. economy remains 0.8% below its pre-pandemic size in February 2020. To put expected U.K. GDP growth in context for 2021, other developed markets growth rates are expected to be: U.S. 6.0%, Japan 2.4%, France 6.3% and Germany 3.1%. You might enjoy looking at the World Bank’s latest World Economic Outlook – October 2021 which you can find here. Given the Bank of England’s sole mandate of maintaining inflation at 2.0%/annum, the combination of an inflation run rate of 3.2% and robust GDP growth are causing most economists to project that the Bank of England will raise its overnight bank borrowing rate before the end of the year. The next Monetary Policy Summary will be released November 4th, so we will know soon. This contrasts with the dual-mandate of the Federal Reserve (full employment and 2%/annum inflation) and slightly ambiguous but not dis-similar mandate of the ECB, both of which will certainly not raise the over-night borrowing rate anytime soon.
As far as U.S. economic data, there was plenty of data released this week, but it was largely in line – on average – with consensus expectations. Headline inflation data for September, released on Wednesday, was slightly higher than expected, coming in at 0.4% (5.4% 12-months running). Core inflation for 12-months running ended September was 4.0%, with all data available at the BLS website here. Yields reacted with the curve flattening, higher at the short end and lower at the longer end. Initial jobless claims, released Thursday (for the prior week), were their lowest level (293,000) since the start of the pandemic (DoL press release here). Retail sales for September, released on Friday, increased 0.8% in September (vs August) and 12.2% for the 12 months ended September. The report from the US Census Bureau regarding retail sales can be found here.
Looking at returns for the week, global equities delivered a solid performance led by Japan and the Eurozone, with only China being negative for the week.
In the US equity market, the market benefitted not only from relative in-line economic data, but also from solid earnings from the largest six US banks and several other companies, as the 3Q21 earnings season kicked off. I do not have the time to drift into bank earnings in any level of detail, but it is fair to say that banks were more or less firing on all cylinders although concerns regarding net interest margin remain disappointing because borrowing remains muted. Still, I understand that net deposits are falling which is a sign of increased spending as pandemic concerns lessen and pre-pandemic economic drivers return.
In the US Treasury market, yields at the short end of the curve increased whilst yields in the intermediate and longer maturities fell. The 2-10 yield differential narrowed, as the curve flattened for the first time in three weeks. This might reflect a higher likelihood of a slightly sooner-than-expected Fed rate increase and moderating economic growth expectations, although I find the data sufficiently mixed and confusing to read anything much into the performance of the US Treasury market this week
In corporate bonds, yields and spreads were slightly better week-over-week, a reversal of a trend that had been negatively affecting both investment grade and high yield bonds for several weeks.
As far as safe haven assets, gold eked out a small gain for the week, remaining relatively range bound, whilst the US Dollar finally showed a bit of weakness. Oil prices continued to increase, and with global demand growing and winter coming, it will probably take either a crack in OPEC+ or the on-lining of US production (fracking) to calm oil markets. The star asset remains Bitcoin, which has now nearly shaken off its poor 2Q21 performance and is reaching its highest price YtD.
In summary, it feels like we are back in a Goldilocks scenario as far as economic data, with earnings also off to a flying start. However, before getting too excited, it is important to remember that this is October, a historically challenging month for financial markets in the past.
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