The third quarter ended on a significantly more uncomfortable note after the comparative calm of the summer.
Inflation is proving to be more stubborn than the advertised ‘transient’ and central banks are moving towards tapering and a recognition that rates will have to go up next year. Not before time, but I don’t envy them the management of the taper. Bond markets took notice and fell, taking the UK ten-year yield back up to 1% (it had been trading close to 0.5% in the summer) and the US ten-year to 1.5%. Long-dated gilts are now down by around 15% over the year, having fallen 10% over the past five weeks.
The combination of pent-up demand post COVID-19 with supply and transport shortages and rising energy costs is pushing up inflation and making a mockery of the forecasts. Increasingly, the wage pressures are there to see too, and it is not surprising to hear Jerome Powell state that the ‘conditions have been met’. Presumably we will hear shortly whether Chairman Powell is to be granted another term at the Federal Reserve.
Domestically, we have been treated to some extra, home grown, problems (many thanks to Brexit) including shortages of HGV drivers, agricultural workers, pig butchers etc. Now (ever reliable) the BBC is pushing a ‘winter of discontent’ theme... I think it is unfortunate that Andrew Bailey is now talking about the supply shortages being ‘transient’. I hope he is right, but it is time for a change in the dialogue.
Meanwhile, China has again been illustrating the limits to acceptable capitalism as the true state of the heavily indebted Evergrande Group was revealed. There is little doubt that this will lead to lower growth for China as property is such an important part of their economy, though they do have ‘levers to pull’ and the Renminbi has remained steady.
Unsurprisingly, US stocks had their worst month of the year with the markets down around 5% including the tech sector. The same was true of most equity markets, though London’s headline indices were shielded by a sharp rally in the major oil companies, which still represent a significant slice of the market. Japanese stocks bucked the trend with a rally on the back of the change in political leadership.
Amidst the gloom, we should perhaps not lose sight of the fact that we do appear to be emerging from the pandemic (as I write Merck has announced successful trials of a Covid-19 antiviral pill). The UK economy is now running at 103% of pre-COVID levels (Jefferies EAR research), while Europe is almost back to pre-COVID levels. The US has struggled with the latest wave of the delta variant but this is now declining rapidly and their recovery appears to be back on track.