Market Commentary: Week to 16 November 2021

16 November 2021

Market News

Bond markets remained in a feverish state last week, after inflation data again suggested that central bankers are wrong about the risk of rising inflation. US inflation rose to 6.2% in October, its highest level in 30 years. One has to go back to the inflationary era of the 1970s and early 1980s to find a period when inflation was consistently above its current levels. With the prices of cars, rent, furnishings, hospital services and recreation all rampant, it is likely to be at least several months before US inflation recedes. And that forecast relies on a resolution of the many issues dogging supply chains. All these factors increase the risk that consumers begin to anticipate higher inflation, bringing purchases forwards and demanding higher wages to compensate. Few economic forecasters have this as their most likely scenario yet, but several are highlighting the risk.

The likelihood of wage pressures is dependent on the supply of labour, which has been dented by the pandemic as older workers, formerly-working parents and migrants have dropped out of the workforce. The expectation is that these trends will, at least, partially reverse, and that this will reduce some of the pressure on wages. However, that can’t come too soon for inflation, as some measures of labour shortages in America are currently at all-time highs. About half of small-business owners in the US are struggling to fill vacant positions and, for every unemployed American, there are 1.4 job vacancies. Moreover, data last week showed that an unprecedented 4.4 million Americans quit their jobs in September. No industry was immune: the numbers increased both in the state and the private sector, and reached records in leisure and hospitality, manufacturing and healthcare.

Bond markets are usually quite good economic forecasters and they are in no doubt that, short-term, interest rates are going up despite the exhortations of central bankers. US 2-year government bond yields spiked from 0.2% to 0.5% in the last month, having spent the past eighteen months in a state of relative apathy. At longer maturities, however, the analysis becomes a question of whether these actions will be good or bad for growth. After all, with governments and corporations so heavily indebted, rate rises can be expected to have a significant impact. The question then is whether the current relatively rapid economic growth will be sustained into the longer-term. Longer-maturity bond yields have been pessimistic, on balance: they have been rising, but are still a long way short of the levels associated with a return to “normal” economic growth. If only investors could disentangle the effect of the $300 billion a month still being spent by central bankers in government bond markets…

It’s not just waves of government cash that are hitting markets – a feature of the post-pandemic world has been the huge increase in the wealth of consumers and in the savings of investors. These effects have been concentrated in the US where, despite the recession, the tens of millions of job losses and lockdown restrictions, households’ disposable income actually increased. Now this money is hitting the markets for manufactured goods as well as for financial assets and, for the first time in living memory, we are in a world where there is too much demand for everything and not enough supply. With the monetary policy needle still set to “maximum growth”, bond markets are rightly reflecting uncertainty around the extent, duration and consequences of inflation.

Stock focus

Marks & Spencer Group shares enjoyed a moment of success in its decades-long turnaround, rallying over 20% after the company raised its profit forecast for the second time this year. Management now expects profits to reach £500m for the current fiscal year, versus a recent previous estimate of £350 million. Improvements were reported across the food, clothing and online sales businesses.

Start-up electric vehicle maker Rivian soared by nearly 70% in its first few days of trading, following its initial public offering last week, taking its market value to over four times its private market valuation of less than a year ago, and above the valuations of Ford and General Motors (which are themselves at the highs of the past two decades). Rivian raised about $12 billion, making it the largest capital raising for an IPO since Facebook in 2012. The company’s founder referred to supply-chain issues facing the automobile industry as being mainly labour-related and said that, in some cases, Rivian’s own staff are being seconded to suppliers to assist with production.

The age of the conglomerate is officially over, and the age of the break-up has begun. Or so it would seem from announcements this week by General Electric Co (GE), Johnson & Johnson and Toshiba Corp to split up their businesses. GE will break into three separate companies, one making jet engines, one making power systems and turbines, plus a third healthcare division. Johnson & Johnson will break itself up into two public companies, one focused on drugs and medical devices, and the other on consumer products, and Toshiba will spin off its energy and infrastructure unit, as well as its device and storage operations.

Chinese internet giant Tencent reported a 13% increase in revenues for the third calendar quarter, the slowest rate of growth since the company went public in 2004. Growth was constrained by a series of new government regulations, most notably impacting Tencent’s advertising and gaming revenues. As the first of China’s big internet firms to report, the results bode badly for the rest of the Chinese technology sector.

Highlights

• The UK’s GDP data for September was the victim of revisions to prior months. September’s growth of 0.6% beat expectations for 0.4%. However, growth estimates for July and August were revised downwards, meaning that growth for the third quarter, as a whole, was a disappointment.
• US inflation in October soared above expectations, reaching a 30-year high of 6.2%. Prices rose broadly, with energy the main culprit, but food, rents and vehicle prices all increased significantly. The rate of US inflation is expected to get worse before it gets better.
• The Sixth Plenum of the Chinese Communist Party delivered little in the way of concrete policy changes, or market-moving announcements. Xi Jinping’s position was entrenched, and "Xi Jinping Thought", already part of school and university curricula, is likely to have greater prominence in the years to come.

Calendar

• UK inflation is expected to have risen to 3.9% in October from 3.1% in September. Prices for motor fuel, energy and second-hand cars are likely to have jumped, and the hospitality and tourism industry is likely to have raised prices in response to a rise in VAT.
• US industrial production is expected to have rebounded by 0.9% in October after a dismal past couple of months in which output shrank. Output has been buffeted by big swings in oil extraction, car production and the energy sector.
• Weekly unemployment claims in the US have been edging consistently lower over the past two months, and are expected to fall again to 260,000, still about 45,000 above their pre-pandemic average.

Important information

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