Markets Continue to Move Higher
At the close of business last Friday, global equities continued to establish record highs after the US Federal Reserve announced that it will reduce the pace of its bond-buying program. The yield on the benchmark 10-year US Treasury note decreased to 1.46% from 1.56% while the price of a barrel of West Texas Intermediate crude oil dropped to $81.27 from $82.26. Volatility, as measured by the Cboe Volatility Index (VIX), declined to 15.4 from 16.4.
Leaders of the G20, the world’s twenty biggest economies, endorsed a global minimum tax aimed at stopping big business from hiding profits in tax havens and also agreed to get more COVID vaccines to poorer nations. Over one hundred global leaders have pledged to halt and reverse deforestation and land degradation by the end of the decade, underpinned by $19 billion in public and private funds to invest in protecting and restoring forests.
The promise, made in a joint statement issued late at the COP26 climate talks in Glasgow, was backed by the leaders of countries including Brazil, Indonesia and the Democratic Republic of Congo, which collectively account for 85% of the world’s forests.
World food prices rose for a third straight month in October to reach a fresh ten-year peak, led by increases in cereals and vegetable oils.
Supply chain challenges and other disruptions affecting global commerce were at the heart of the discussions at the G-20 of World Leaders’ summit. The leaders agreed to strengthen and diversify the entire supply chain ecosystem.
Over five million people have died from COVID-19 in less than two years, according to Johns Hopkins University data. In the United States, 745,836 people have died because of COVID, making it the country with the highest number of recorded deaths.
CANADIAN ECONOMIC NEWS
Our central bank said that inflation may be around longer than expected. Our inflation rate currently stands at 4.4 percent, up from 4.1 percent in August. Our central bank expects the inflation rate to near 5 percent by the end of this year, which remains above its mandate target of 2 percent. The bank’s policy interest rate has remained at 0.25 percent to reduce short-term borrowing costs for businesses and households and spur economic recovery. In 2020, the Bank of Canada had not expected interest rate increases until 2023. With the additional concerns about inflation far exceeding its original inflation projections, it has moved up that timeline to 2022. We are now expecting the first central bank rate increase in April 2022.
US ECONOMIC NEWS
After a difficult September, all three major US averages closed at record highs on Friday. The S&P 500 Index and Nasdaq clinched their best months since November 2020, rising 6.9% and 7.3%, respectively, and the Dow Jones Industrial Average rose 5.8% in October. For the year, the S&P 500 is up more than 25%.
The US economy added more jobs than expected in October, while the unemployment rate fell to 4.6%. Nonfarm payrolls increased by 531,000 for the month, compared to the Dow Jones estimate of 450,000. Private payrolls were even stronger, rising 604,000 as a loss of 73,000 government jobs pulled down the headline number.
The number of Americans filing new claims for unemployment benefits fell to a fresh 19-month low last week as initial claims for state unemployment benefits fell 14,000 to a seasonally adjusted 269,000 for the week ended October 30.That was the lowest level since the middle of March 2020; claims have now declined for five straight weeks.
Fed to taper bond purchases
The Fed announced it will begin reducing the pace of its monthly bond purchases later this month, with reductions of $15 billion each month—$10 billion in Treasuries and $5 billion in mortgage-backed securities—from the current $120 billion a month that the central bank is buying. The Fed slightly altered its view on inflation, acknowledging that price increases have been more rapid and enduring than central bankers had forecast, but the central bank still used the controversial word “transitory.”
Fed Chair Jerome Powell said he expects inflation to keep rising as supply issues continue and then pull back around the middle of 2022, at which time the bond purchases would conclude. The Federal Open Market Committee voted not to raise interest rates from their anchor near zero, a move expected by the market. Officials don’t envision rate hikes beginning until tapering has ended.
US Senate Majority Leader Chuck Schumer said that Democrats had reached an agreement on lowering prescription drug prices. The plan is expected to grant the US government power to regulate the prices of some of the most expensive drugs on the market and redesign the Medicare drug benefit, so it limits out-of-pocket costs for seniors to $2,000 per year.
US construction spending unexpectedly fell in September amid declines in outlays on both private and public projects. The US Department of Commerce said that construction spending dropped 0.5% after edging up 0.1% in August.
EUROPEAN ECONOMIC NEWS
BOE stands pat for now
The Bank of England held interest rates steady on Thursday, defying many investors’ expectations that it would become the first major central bank to hike rates following the pandemic. The Bank’s Monetary Policy Committee voted seven to two to keep its benchmark interest rate unchanged at its historic low of 0.1% and six to three in favour of continuing the existing program of UK government bond purchases at a target stock of £875 billion ($1.2 trillion). However, while the BOE indicated that a rate hike is imminent, it pushed back on market pricing that would have the benchmark rate to increase to around 1% by the end of next year.
Eurozone manufacturing activity remained strong last month but was curtailed by supply chain bottlenecks and logistical problems that sent input costs soaring. The Purchasing Managers Index dipped to an eight-month low of 58.3 in October from September’s 58.6, shy of an initial 58.5 flash estimate but still comfortably above the 50 -mark separating growth from contraction.
Europe at pandemic’s epicentre
Europe is facing a resurgence of COVID-19 cases, according to the World Health Organization’s Dr. Hans Kluge, who warned that the region was once again at the epicentre of the pandemic. Kluge, the WHO’s regional director for Europe, said the number of new daily cases was nearing record levels in 53 countries across Europe and central Asia. With nearly 1.8 million new cases and 24,000 deaths reported last week, the WHO’s European and central Asia region saw a 6% increase in infections and a 12% increase in fatalities compared with the previous week. The region accounted for 59% of all cases globally and 48% of reported deaths last week, Kluge said.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
China showing signs of “stagflation”
There are signs of stagflation in China as prices continue to rise and the latest manufacturing data show production slowing, economists say. Stagflation occurs when the economy is simultaneously experiencing stagnant activity and accelerating inflation. The phenomenon was first recognized in the 1970s, when an oil shock prompted an extended period of higher prices but sharply falling GDP growth.
China’s factory activity contracted more than expected in October, shrinking for a second month, an official survey released on Sunday showed. In contrast, the output price index has risen to the highest level since it was published in 2016.
Chinese developers remain stressed
Chinese developer Modern Land said a default on a bond repayment last week has pulled forward repayment dates for a further $321 million worth of notes, and the company withdrew an interim dividend to hold on to cash.
Separately, sales of Hong Kong–listed shares of Chinese real estate developer Kaisa Group Holdings were halted on Friday, following news that it had missed a payment on a wealth management product earlier in the week. Investors have been closely monitoring interest payments on Evergrande’s bonds; the company initially failed to make two payments but managed to make them before the end of the thirty-day grace period. All eyes are now on other interest payments due in November and December.