Maybe we reached peak worry for this mini cycle on 21st October.
That was the day when inflation hit the headlines again as Unilever reported an increase in their prices of 4.1% in the third quarter (passing on the jump in raw material costs) and expected to be doing the same in Q4. The UK 10-year yield hit 120bp (it was at 50bp in the summer and just 17bp around the turn of the year) and the US 10-year 170bp. That translated into steep falls for Gilts, the 20-year had fallen 11% in capital terms since August (almost 15% over the year). Generally, looking a shade overdone.
There is not much support for this argument in the energy markets, the price of oil is still around 9% higher than at the end of September, though maybe it is losing some momentum, gas prices are around 2% higher. Both BP and Royal Dutch Shell hit high points for their recent resurgence around 18th October, and the mining companies are selling-off again. Maybe this also means that the rally in ‘value’ stocks is over for now. Otherwise, equity markets rallied well from the end-September lows, notably in America. We are now in the midst of the Q3 reporting season, which has started strong, notably for Alphabet and Microsoft among the big techs.
However, inflation is still recording big numbers (5.4% US CPI for September, 3.1% UK) so real bond yields remain unappealing, particularly for longer dates. We still expect tapering of asset purchases to start in November with rate increases to follow. The Bank of England will probably be the first to move on rates, we would expect to see the Base Rate up to 25bp before the year-end with a further 25bp increase in the New Year. We should point out that the Bank, should anyway, be removing these ‘emergency’ measures, regardless of the jump in inflation. The UK economy is growing, household finances are strong, unemployment is much better than expected and businesses are keen to invest – if they can’t remove the emergency support now, when can they?
On-going supply chain problems, high energy prices and comparisons to last year’s levels mean that the inflation numbers will continue to look bad for a while yet and growth numbers may disappoint. But much of this will change in the New Year and the ‘new’ consideration here is the Chinese economy, which we expect to be slowing rather more than expected. The Evergrande debacle looks like a pivotal moment, residential property prices in China are now falling, while ‘common prosperity’ (let’s not call it levelling-up) continues to confuse.
My first impression of today’s UK budget was of the consummate ease with which it was delivered by the Chancellor, Rishi Sunak. He was in the happy position of having rather more in the kitty than expected, thanks to higher tax receipts and excessive caution from the OBR in March. Jockeying for a future leadership role maybe?