Markets Take a Breather

Markets Take a Breather

At the close of business last Friday, global equities fell slightly from record levels, snapping a five-week winning streak. The yield on the US 10-year Treasury note rose 10 basis points from a week ago to 1.56% after stronger-than-expected US inflation data. The price of a barrel of West Texas Intermediate crude oil dropped $0.50 to $80.75 while the Cboe Volatility Index (VIX) rose to 17.25 from 16.4 on the week.



OPEC sees high prices crimping demand for oil for the rest of 2021. However, the organization expects global economic growth to remain robust despite high energy costs, forecasting a 5.6% global expansion this year and 4.2% next year.



Our stock market is up 24.87% year to date, which is the good news. The bad news is that you are likely to see inflated food prices at your local grocery stores over the next few months. Food prices have risen by about five percent across the board since the start of the year, but we are actually seeing much higher overall cost of goods with some items up as much as 25%. Be thankful for strong returns in your portfolio again this year but with bottlenecks not expected to ease until well into 2022, be prepared to spend more for virtually everything you buy.



With about 92% 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 39% while sales rose about 17.5% compared with the same quarter a year ago. At Friday’s close, the Dow was up 19.95%, the S&P 500 is up 24.67% and the Nasdaq is up 23.06%. Amid lingering labor shortages, the Wall Street Journal reported on Friday that North American companies ordered a record number of industrial robots this year.

The odds of swift passage of Biden’s Build Back Better agenda diminished after the release of Wednesday’s US inflation data as Senator Joe Manchin, one of two moderate Democratic Senators expressing misgivings over the legislation, reiterated his concern that the additional government spending would fuel a further rise in prices. Manchin said inflation is not transitory and is getting worse. Late last week, the US House of Representatives passed a $1.1 trillion bipartisan infrastructure package. A $1.9 trillion COVID-19 relief bill passed in March.

The idea that the ongoing surge in the US Consumer Price Index will prove transitory is being put to the test as price hikes spread through the economy, no longer confined to sectors affected by supply chain disruptions or short-term pressures stemming from the reopening.

The CPI rose 6.2% year over year in October while the core measure, which excludes food and energy prices, rose 4.6%, a 30-year high. While wage pressures are contributing to higher prices, most consumers’ pay cheques are not keeping pace, crimping their buying power. In reaction to the data, US President Joe Biden directed his National Economic Council to pursue means of reducing energy costs, which he believes are the major source of the price pressures. However, rising prices were seen in an array of categories, including rents, used vehicles and health care.

The yield on the US 10-year note rose 14 basis points on Wednesday, the day the report was released, as futures traders priced in an interest rate hike from the US Federal Reserve as early as next July.

Biden broadens search for Fed chair
Bloomberg reported this week that President Biden interviewed Fed Governor Lael Brainard last week for the position of Fed chair. Biden interviewed current Chair Jerome Powell as well. Powell, once thought a shoo-in for the top job, has received pushback from progressive Democrats for easing banking regulations adopted in the wake of the global financial crisis and for a trading scandal that forced the resignation of two regional Fed bank presidents. Brainard, who has been a governor since 2014, is seen as tougher on the regulatory front and as having a more dovish approach to monetary policymaking.

Also this week, Fed Governor Randal Quarles announced he will resign from the Fed’s board of governors at the end of this year, when his term as chair of the Financial Stability Board, an international body, expires. Until October, when his tenure as vice chair for supervision expired, Quarles was the Fed’s top bank regulator. His term as a Fed governor would not have expired until 2032.



The US warned European allies this past week that Russia is amassing troops along its border with Ukraine and may be planning an invasion. A similar buildup in June was eased after Biden proposed a summit with Russian President Vladimir Putin. Tensions over the movement of migrants toward the European Union and the transport of Russian natural gas supplies through Ukraine to the EU are two of the flashpoints between the two countries.

The British economy grew a slower-than-expected 1.3% in Q3 following a 5.5% Q2 jump at a time when many businesses were reopening after the lifting of coronavirus restrictions. The Bank of England forecasts that growth will slow to a 1% pace in Q4 amid lingering supply chain disruptions and reduced household and business spending resulting from a surge in inflation.



Embattled Chinese property developer Evergrande averted a last-minute default this past week as China attempts to wind down the company’s operations without damaging homebuyers and other businesses in the property sector.

Communist Party elevates China’s Xi
On Thursday, China’s Communist Party adopted a historical resolution that elevated China’s President Xi Jinping to a status equaled only by previous rulers Mao Zedong and Deng Xiaoping, deeming him a pivotal historical figure. The move paves the way for Xi to remain in office for a third term and perhaps for life.

US and China pledge climate action
On Wednesday at the COP26 conference in Glasgow, China and the United States issued a surprise joint declaration on boosting climate action. The statement comes less than a week before a planned virtual summit between Presidents Biden and Xi on Monday. Though the accord was criticized as vague in some quarters, China’s climate envoy Xie Zhenhua said the two sides are committed to more pragmatic and concrete cooperation. The joint declaration says the two countries plan to cooperate in reducing methane emissions, protecting forests, improving technology and increasing the use of renewable forms of energy.

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