Your weekly economic update from the team at FXD Capital
US consumer prices rose 5.4% year-on-year in September, notching up their fifth consecutive month of prints over the 5% mark. Despite sustained data pointing towards an acceleration towards monetary policy tightening, markets enjoyed a relatively drama-free week. Past August, equities have been entering bear market territory, but on Thursday enjoyed their largest daily rally since March, with indices bolstered by solid earnings reports. Companies continue to make hay while the sun shines, scrambling to raise capital at the top of the market; US technology listings have already passed $500bn for the year.
In the rates markets, US ten-year yields are holding steady around 1.55%, but it’s the short-term markets where the action resides, with prices hitting the highs of the March 2020 nadir. Two-year and five-year rates at 0.36% and 1.09%, respectively – both heady levels, with the curve compression showing how upcoming hikes are becoming a formality. Yield increases in the short end are driven by commodity markets, with energy markets forming the centre of the current storm.
Where do we start? With oil, WTI prices hit seven-year highs, European November gas contracts are up 3.6% on the week, Russia has Europe with a begging bowl in hand, and Chinese coal is the next target of attention. Regarding the latter, floods in the middle kingdom have impacted coal stocks, causing price shocks and leaving coal-dependent countries like India with severely depleted back stocks. All in, the supply shortages in commodity markets are the primary driver of price pressures right now, with their ripple effects causing the very stories that Daily Mail editors dream about.
Turkey continues to follow a Squid Games-based approach to governance of its central bank, with another head removed from its position this week. The Lira is at an all-time low versus the dollar (9.19%), with the currency losing 59% of value since 2018. Following New Zealand’s lead last week, Singapore is now making overtures about rate tightening, albeit controlled via its exchange rate mechanism. The economy of Singapore grew 6.5% YoY in Q3, signs of which have prompted calls for tapering.
Moving towards banks, institutions are enjoying a healthy year, but performance is being dragged kicking and screaming by advisory work. Hence, the best performers are the mature banking groups with diversified operations. In terms of the “old fashioned” banking lines, there is sustained pressure on cost increases from labour; interest spread compression and loan growth looking exhausted. This week, Chase launched its UK retail bank offering, which will be fascinating to see how it performs. With UK current accounts invariably at saturation, the offer of 1% cashback on purchases is the only real hook to entice customers to, what is, a wholly commoditised product. JPMorgan’s acquisition of Nutmeg possibly looks at their broader play with banking as an on-ramp to automated wealth management.
Also tangentially related to rates, there are signs that the UK Treasury will look to review fee caps encumbered on pension managers for overseeing workplace plans. The current cap of 0.75% is a natural restraint towards diversifying investments into non-public markets (i.e., VC, PE and infrastructure), which naturally has led to the sector being underfunded – especially concerning the US. With pressure on releasing the cap and inviting more capital into private markets, Sunak’s thesis is to essentially bootstrap the UK’s infrastructure and green technology push with the public’s saving pots. It sounds all well and good, so long as such investment is purely discretionary. The reason for such a preamble is to highlight a potential future trend whereby allocations may shift away from traditional fixed-income instruments, which could lead to upward movements on liability pricing due to the softened demand.
Germany’s GDP forecasts were cut from 3.7% to 2.4% on the year as bottlenecks continue to turn the screw on developed nations. Moreover, industrial production in Germany is still below pre-COVID levels, a sign of how the supply chain malaise can hamper production-led markets.
Finally, in the US, the debt ceiling shift was approved in the Lower House. Ratification will now pass to President Biden, so there is no risk of any lock-out or insecurity about defaults (for the time being). In addition, Federal Reserve minutes for September showed confirmation of pundits’ predictions for taping to begin and wrap-up mid-2022. While “soon” was the closest the minutes came to anything concrete, the goal of reaching 2% inflation was reaffirmed, and attention pivots towards monitoring the jobs report, which seems to be the leading bellwether for pulling the trigger.
All the best for the week ahead
Alex
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
Would you like to receive FXD Capital’s Insights directly to your mail inbox? Click the button to subscribe to our email newsletters.
Subscribe to our weekly economic update
This document should be considered a marketing communication for the purposes of the FCA rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information given in this document is for information purposes only and is not a solicitation, or an offer to buy or sell any security or any other investment or banking product. It does not constitute investment, legal, accounting or tax advice, or a representation that any investment or service is suitable or appropriate to your individual circumstances.
You should seek professional advice before making any investment decision. The value of investments and the income from them can fall as well as rise. An investor may not get back the amount of money invested. Past performance is not a reliable indicator of future results. Investment returns may increase or decrease as a result of currency fluctuations.
The facts and opinions expressed are those of the author of the document, as of the date of writing and are liable to change without notice. We do not make any representations as to the accuracy or completeness of the material and do not accept liability for any loss arising from the use hereof. We are under no obligation to ensure that updates to the document are brought to the attention of any recipient of this material. Please note that this commentary may not be reproduced, distributed, disseminated, broadcasted, sold, published or circulated without prior consent from FXD Capital Limited.
FXD Capital Limited is registered in England & Wales (No. 11397216) with its registered office at 3 Lloyds Avenue, London, EC3N 3DS. FXD Markets Limited is registered in England & Wales (No. 11876665). FXD Markets is an FCA registered trading name of Kyte Broking Limited. Kyte Broking Limited registered in England & Wales (No. 02781314) is authorised and regulated by the Financial Conduct Authority (“FCA”) under FRN: 174863 with its registered office at 55 Baker Street, London, W1U 8EW. Kyte Broking Limited is a member of the National Futures Association (“NFA”) under NFA ID: 0288293.