At the close of business last Friday, global equities tested record highs on the strength of positive third-quarter earnings results as expected.
The yield on the benchmark 10-year US Treasury note increased to 1.64% from 1.58% while the price of a barrel of West Texas Intermediate crude oil rose to $82.68 from $82.20. Volatility, as measured by the Cboe Volatility Index (VIX), dropped to 16.0 from 16.1.
Supply chain issues deepen
In the future, expect continued growth but slower growth. We believe the world may face prolonged disruptions to shipping cargo flows, as logistical headaches such as truck shortages weigh on backed-up supply chains and rebounding trade have driven up volume.
Different parts of the world have experienced supply chain issues, such as power shortages in China and a scarcity of truck drivers in the United States, Germany and the United Kingdom, which has caused large backlogs of goods at shipping ports. Supply chain bottlenecks have affected a variety of sectors, services and goods, ranging from a semiconductor shortage affecting electronics and autos to problems in the supply of meat, medicines and household products.
Amid higher consumer demand, freight rates for goods coming from China to the US and Europe have soared, which has led to high prices once those products have hit store shelves. We believe the supply chain issues could also hurt corporate earnings and global growth, meaning the global recovery may be pushed well into 2022 until these issues are resolved.
Except for England, we do not expect interest rates in developed markets to increase marginally until mid 2022. This is not the case for emerging markets. The International Monetary Fund said they expect interest rate increases to continue across Latin America as the region reacts to inflation pressures, even while economies operate below their potential.
The IMF also said inflation expectations remain anchored in Mexico as the central bank has tightened monetary policy. Unanchored expectations in Argentina will require action on several fronts, the IMF indicated.
CANADIAN ECONOMIC NEWS
We noticed this week that an emerging trade irritant between Canada and the United States that had been quietly simmering for months has now become front of mind. Our central government sent a letter to nearly a dozen senior US officials Friday expressing concern over the content of a US budget bill. The concern is about our auto sector and the “Buy American” reference in this bill.
Canada could potentially see a decline in Canada-US auto co-operation, losing tens of thousands of Canadian jobs and doing collateral damage to those US auto workers involved in the cross-border auto trade. Canada has been ramping up electric vehicle production, which could be severely impacted.
US ECONOMIC NEWS
With about 23% 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 32% while sales rose about 15% compared with the same quarter a year ago.
Weekly jobless claims in the US hit another pandemic-era low last week as first-time filings for unemployment insurance totalled 290,000 for the week ended October 16, the US Department of Labour reported. This was the second consecutive week that claims totaled less than 300,000.
Homebuilding in the US unexpectedly fell in September, and permits dropped to a one-year low amid acute shortages of raw materials and labour. However, the National Association of Realtors said that sales of existing homes increased 7% in September, to an eight-month high. Demand for US single-family rental homes rose 9.3% in August year over year, up from a 2.2% year-over-year increase in August 2020. For the first time since before the pandemic hit, all major metropolitan housing markets showed positive rent growth. Miami led the way with a 21% gain, followed by Phoenix at 19% and Las Vegas at 15%.
Black Americans now account for 11% of board seats at S&P 500 companies, edging closer to their roughly 13% representation in the general US population. Women make up 30% of all S&P 500 directors, up from 28% a year earlier and 16% a decade ago. Ethnic and racial minorities account for 47% of all new directors, compared to 22% in the prior year.
The wealthiest 10% of Americans now own a record-high 89% of all US stocks, according to the latest data from the US Federal Reserve. The growing concentration of wealth comes despite millions of new retail investors coming into the stock market for the first time during the pandemic.
The US Food and Drug Administration authorized booster shots of both the Johnson & Johnson and Moderna COVID-19 vaccines and also authorized mixing and matching vaccines, allowing Americans to get a booster shot that differs from the one used for their initial dose.
EUROPEAN ECONOMIC NEWS
BoE hints at imminent rate raise
Bank of England Governor Andrew Bailey sent a fresh signal on Sunday that the British central bank is gearing up to raise interest rates for the first time since the onset of the coronavirus crisis as inflation risks mount. Bailey said he continued to believe that the recent jump in inflation would be temporary but that a surge in energy prices would push it higher and make its climb last longer, raising the risk of higher inflation expectations. Investors speculate that the BoE might become the first of the world’s biggest central banks to raise rates, either later this year or early in 2022.
UK medical professionals have issued an urgent plea to the British government to reimpose some COVID restrictions because of the increased level of infections and hospitalizations in the country. The country’s health minister said COVID cases may hit 100,000 a day in winter but that contingency measures are not currently in place. In a related matter, coronavirus cases in Europe increased for the third consecutive week.
Growth in euro zone business activity slowed this month as firms faced rising costs due to supply chain constraints and the bloc’s dominant service industry struggled amid ongoing COVID-19 concerns, a survey showed.
IHS Markit’s Flash Composite Purchasing Managers’ Index, a gauge of overall economic health, fell to a six-month low of 54.3 in October from 56.2 in September. Also, on Friday, for the first time in seven years, a key market gauge of euro zone inflation expectations rose to 2%, the ECB’s inflation target.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
China growth slows
China’s third-quarter GDP grew a disappointing 4.9% as industrial activity rose less than expected in September. That missed expectations of a 5.2% expansion.
Many factories had to stop production in late September as a surge in the price of coal and a shortage of electricity prompted local authorities to abruptly cut off power.
Industrial production rose by 3.1% in September, below the 4.5% expected. Real estate and related industries, which account for about a quarter of China’s GDP, also came in weaker than expected, up 7.3% from a year ago compared with the expected 7.9% figure.
IMF cuts Asia growth forecast
The International Monetary Fund slashed this year’s economic growth forecast for Asia and warned that a fresh wave of COVID-19 infections, supply chain disruptions and inflation pressures pose downside risks to the outlook.
The IMF said China’s economy will grow by 8.0% this year and 5.6% in 2022 but that the recovery remains unbalanced as repeated coronavirus outbreaks and fiscal tightening weigh on consumption. Although Asia Pacific remains the fastest growing region in the world, the divergence between Asian advanced economies and emerging market and developing economies is deepening.
The IMF believes risks are tilted to the downside, mainly on uncertainty over the pandemic, supply chain disruptions and potential spillovers from US policy normalization.
Evergrande staves off default
Just before the end of a thirty-day grace period, Chinese property developer Evergrande has made a key interest payment due September 23d. That will allow Evergrande to avoid a widely expected default. The $83.5 million interest payment on the indebted company’s March 2022 offshore bond was being watched closely by investors after Evergrande warned twice in September that it may default.
Several Chinese officials sought to reassure homebuyers and markets this week that the route in the property sector would not be allowed to trigger a full-scale crisis. Chinese developers have increasingly taken on debt over the past few years, particularly in overseas markets.
Russia’s central bank increased its key interest rate sharply to 7.5% on Friday — its sixth hike this year — in an effort to tame the highest inflation since early 2016 and indicated that more rate rises were possible.
Separately, President Vladimir Putin announced on Wednesday that Russians will take a paid week off to try to combat the COVID-19 crisis in the country as the number of daily deaths reached its highest level since the start of the pandemic.
Cuba reached a deal with the Paris Club of creditor nations to postpone until next year an annual debt payment due in November, according to diplomats from five of the governments involved. This is the latest sign the Communist-run country is suffering a grave foreign exchange crisis.