At the close of business last Friday, global equities advanced on the week as markets reacted well to more details disclosed about the US Federal Reserve’s plan to taper its asset purchase program.

The yield on the US 10-year Treasury note declined to 1.57% from 1.61% a week ago while the price of a barrel of West Texas Intermediate crude oil rose to $82.15 from $79.80 last Friday. Volatility, as measured by the Cboe Volatility Index (VIX), declined to 16.5 on Friday from 18.7 last week.

 

MACRO NEWS

IMF trims global outlook
The International Monetary Fund updated its World Economic Outlook this week, trimming its 2021 global growth forecast by 0.1% to 5.9%. The US forecast was cut to 6% from 6.1% while the euro zone outlook was raised to 5% from 4.6%. China is expected to grow 8% this year. Amid continuing supply chain bottlenecks, the IMF warned central banks need to be ready to take swift action against inflation if the recovery strengthens more than expected.

 

CANADIAN ECONOMIC NEWS

In Canada, frustrated house hunters are experiencing house prices that keep going up into unaffordable territory. The average sale price of a Canadian home is up 14 percent in just one month. Our most expensive real estate markets in Vancouver and Toronto are dangerously overvalued.

Canada’s inflation rate hit four per cent in August, the fastest increase in the cost of living in almost twenty years. As of Friday, the new data on house prices means they are going up at over three times that record pace.

With more people working from home, the pandemic has had an unexpected impact on house prices in that instead of causing people to be more conservative because of the economic uncertainty, buyers have been eager to pay more. Our central bank slashed its benchmark rate to help stimulate the economy through the pandemic, and lenders passed those rates on to consumers as record low mortgage rates resulting in increased housing demand.

 

US ECONOMIC NEWS

This past week, Goldman Sachs cut its US economic growth forecast to 5.6% in 2021 from 5.7% and to 4% in 2022 from 4.4%. With about 8% of the constituents of the S&P 500 Index having reported for Q3 2021, blended earnings per share shows that earnings growth is running at 29.8% while sales rose about 15% compared with the same quarter a year ago. Continued supply chain snags and rising input costs have investors focusing on the potential for margin erosion in coming quarters.

US inflation remained elevated in September
Consumer prices rose 5.4% year over year in September, up from August’s 5.3%, as global supply chains remain disrupted. Food, shelter and energy price rises all contributed to the uptick. While inflation pressures are likely to ease once logistical logjams resulting from the pandemic are unraveled, the process is taking longer than expected, with no timely resolution in view.

Central banks remain in a quandary over how to deal with the price rise as negative supply shocks are not easily addressed by monetary policy. Policymakers are watching inflation expectations closely for signs that inflationary psychology is taking hold.

The recent spike in the cost of living resulted in the US Social Security Administration announcing that monthly payouts to retirees and other beneficiaries will rise 5.9% in 2022, the largest such adjustment in forty years.

Stress spreads beyond Evergrande; Fed lays out taper timeline

In the minutes from the September meeting of the Federal Open Market Committee, the Fed outlined its plan to taper its purchases of Treasuries by $10 billion per month and mortgaged-backed securities by $5 billion, winding down the asset purchase program by next summer. The committee could adjust the pace of the moderation of its purchases if economic developments differ substantially from what they expect.

Biden reaches out to US oil and gas producers
After earlier appealing to OPEC to increase production quotas, the Biden administration this week implored domestic energy producers to help curb rising prices. This is a significant shift for the administration, which has pledged to move the country away from fossil fuels and has halted oil and gas development leases on public lands and cancelled the Keystone XL pipeline.

Energy producers say they are reluctant to ramp up production, which requires significant capital investment, amid an increasingly hostile regulatory environment.

At the urging of the White House, Southern California ports will operate 24/7 to try to alleviate logistical bottlenecks.

 

EUROPEAN ECONOMIC NEWS

Soaring gas prices prompt output cuts in Europe
Energy-intensive industries such as makers of ammonia and fertilizers have curbed production in Europe because of rising price of natural gas and other forms of energy. German electricity rates reached record highs this past week, raising concerns that additional industries may soon scale back production.

There are growing fears that consumer demand will be undermined because of strains on household budgets from the energy cost spike.

 

JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS

US-China trade talks break little new ground
US Trade Representative Katherine Tai and Chinese Vice Premier Liu He met virtually last week, the second high-level trade meeting since President Biden took office.

Tai emphasized US concerns relating to China’s state-led, nonmarket policies and practices that the government contends harm the American economy. The meeting helped set the stage for a virtual summit between Biden and China’s president Xi Jinping in coming weeks.

We expect China’s President Xi will expand his push to curb capitalist forces in China’s economy by focusing on the ties between the countries’ dominant state-owned banks, and on big private-sector entities.

Amid COVID restrictions, Japanese GDP slumped 0.9% in August from the prior month, though the country’s state of emergency has now been lifted.

The Bank of Korea signaled it is likely to raise rates in November from their present 0.75%.