Global equity markets strengthened in October as a bumper US earnings season boosted investor sentiment. Close to month end, with 263 out of 500 S&P 500 companies having reported results, the aggregate revenue surprise was +1.6% and the aggregate earnings surprise was +9.7%. Better-than-expected sales figures were reported by 67% of companies and 82% of companies released bottom-line figures ahead of consensus. The Q3 21 sales growth rate was 14.8% y/y and the earnings per share growth rate was 33.5% y/y.
Risk factors that impacted market sentiment in September diminished somewhat – notably China Evergrande managed to make coupon payments during the month. Still, the US 10-year treasury yield ticked higher as inflation fears persisted. Labour shortages and high energy prices remained front and centre in driving inflation expectations. The dollar weakened slightly.
- We have a neutral investment case for emerging markets, as most news flow, particularly in China, has seemingly filtered its way into the price. We are cautious before taking on a firmer stance as economic data needs to improve.
- Precautionary savings will likely continue unwinding, although consumers’ spending power should be relatively lower compared to the first half of the year.
- We continue to believe that the dollar will depreciate amid its counter-cyclical nature with the reflationary growth cycle.
- The vaccine roll-out is expected to continue boosting broader equity markets in the short term.
- Monetary policy is expected to remain accommodative in 2021, however, the US Federal Reserve is expected to communicate their tapering plans before the end of the year.
- Inflation is expected to rebound in 2021 and remain relatively sticky, particularly in the US.
- Commodities to remain elevated in the short term amid relatively strong demand dynamics and supply chain disruptions.
- We believe that yield curve movements will likely have a mild upward bias, particularly as we anticipate a resolution around the US debt ceiling before year end.
Data from the US was on balance better than expected
On a preliminary basis, the IHS Markit Composite PMI for the US rose to 57.3 in October 2021 from 55.0 in the previous month. This was ahead of expectations and signalled the fastest growth in private sector activity for three months as both manufacturing and services accelerated. Retail sales increased 13.9% y/y in September, from a revised 15.1% in the month before, but remained above forecasts. The trade deficit widened to a record high $73.3 billion in August, ahead of the estimated $70.5 billion, as exports edged up 0.5% m/m while imports were up 1.4% m/m. The unemployment rate dropped to 4.8% in September – the lowest since the coronavirus pandemic began in March 2020. This was below market expectations of 5.1% as the labour market saw a decrease in vacancies.
Annual inflation climbed to a 13-year high of 5.4% in September, up 0.1% from the month before, and above forecasts. Fed Chair Jerome Powell suggested that the Federal Reserve is on track to begin stimulus tapering, but added that it would be premature to raise interest rates just yet. He also mentioned that supply bottlenecks are still prevalent and, in some cases, have even worsened. Higher inflation and increased pressure on wages will likely continue into the next year but are still expected to eventually subside.
Eurozone data pointed to higher inflation and slowing growth
Initial estimates showed the IHS Markit Eurozone Composite PMI fell to 54.3 in October, below market expectations of 55.2, pointing to the slowest expansion in business activity in six mnths. Consumer confidence moderated for the fourth consecutive month, broadly in line with forecasts. The trade surplus narrowed sharply to €4.8 billion in August 2021, from €14 billion in the same period last year, amid a surge in energy prices around the continent. This was well below the market consensus of €16.1 billion as imports jumped 26.6% while exports rose at a slower 18.2%. The seasonally adjusted unemployment rate in the euro area edged down to 7.5% in July, as anticipated, with the number of unemployed persons decreasing by approximately 261 000.
Annual inflation was confirmed at 3.4% y/y in September – the highest rate since before the global financial crisis in 2008 – and well above the Central Bank’s target of 2%. The ECB concluded that a moderately lower pace of net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) for the rest of the year would be appropriate, amid favourable financing conditions and an improved medium-term outlook for inflation. The ECB maintained its stance on higher growth forecasts for the year.
UK data continued to point to an uneven recovery
Britain's gross domestic product grew by 6.9% y/y in August 2021, easing from a revised 8.8% in the month before and beating market expectations of 6.7%. According to preliminary reports, the IHS Markit/CIPS UK Composite PMI rose to 56.8 in October, from 54.9 in the previous month. This was above the forecasted 54 as business spending improved. The GfK Consumer Confidence Index fell for the third straight month to -17 in October, compared to expectations of -16. Retail sales volumes decreased 1.3% in September compared to the same period last year and was well below the market consensus of a 0.4% decline. The UK trade deficit widened to £3.7 billion in August, above the anticipated £2.8 billion – this was the region’s largest trade shortfall since last December, as exports fell 2% while imports edged 0.5% lower. The unemployment rate declined further to 4.5% in the three months to August 2021, in line with market expectations, as the labour market continued to recover. Annual inflation edged down to 3.1% y/y in September – from a nine-year high in the month before. This was below the forecasted 3.2%.
Once again, during its October meeting, the Bank of England left its benchmark interest rate at a record low of 0.1%, and its bond-buying programme unchanged at a total of £895 billion by the end of this year. The central bank also said that the case for modest tightening strengthened from August, as inflation could persist above 4% well into 2022, although considerable uncertainties remain.
Data from China was better than expected
China’s composite PMI for September climbed to 51.4, from a 16-month low in the previous month, as coronavirus outbreaks in some parts of the country subsided. This was above expectations of 49. Retail trade rose by 4.4% y/y, following a 2.5% gain in the month before, beating forecasts of 3.3%, as consumption strengthened. China's trade surplus widened to $66.76 billion in September, above the market consensus of $46.8 billion. This was the largest trade surplus since last December as exports extended their double-digit growth while imports rose at a softer pace. China’s surveyed urban unemployment rate declined to 4.9% last month and was below expectations. The annual inflation rate was unexpectedly lower at 0.7%, compared with market estimates of 0.9%. This was the lowest reading since March amid a steeper decline in the cost of food.
Japanese economic releases were mixed relative to expectations
The Jibun Bank Composite PMI reading was up to 50.7 in October, from a final 47.9 in the prior month, as shown by flash estimates. This was slightly ahead of expectations following a rebound in services activity, while factory growth was at a three-month high. Retail sales fell by 3.2% y/y in August 2021, compared to the forecasted decline of 1% as consumption weakened. Japan posted a trade deficit of ¥622 billion in September – above the estimated of ¥519 billion. This was the second straight deficit since May as exports rose by 13% y/y while imports surged at a steeper 38.6% y/y. The unemployment rate remained unchanged at 2.8% in August, as expected, with the number of unemployed persons rising by 10 000.
The Bank of Japan left its key short-term interest rate unchanged at -0.1% and maintained the target for the 10-year Japanese government bond yield at 0% during its September meeting, as widely expected. Policymakers, however, offered a bleaker view on exports and factory output, amid supply chain disruptions. The central bank reiterated that it won’t hesitate to take on further easing measures if necessary.
In South Africa, economic data came in better than expected
The composite leading business cycle indicator edged up by 0.7% from a month earlier in August, rebounding from a 2.4% drop in the previous month. The IHS Markit PMI increased to 50.7 in September from 49.9 in August, when lockdown measures were eased to Level 2. Output expanded for the first time since May, as improving economic conditions drove increased activity and consumer demand. The trade surplus widened to R42.4 billion in August from an upwardly revised R37 billion in July, beating market expectations. Exports grew by 9.7% while imports grew at a slower 8%. Retail sales shrank 1.3% from a year earlier in August, defying market estimates of a 2.6% rise. The value of recorded building plans passed rose 33.5% from a year earlier in August, the seventh straight month of increases. Mining production rose by 2% y/y in August, following a 12.3% jump in the previous month. It was the sixth straight month of rising mining activity, although at a weaker pace. Manufacturing production rose by 1.8% y/y in August, beating market expectations. Producer prices advanced by 7.2% in August, up from 7.1% in July and in line with market expectations. Private sector credit grew by 1.12% in August, beating market expectations of a 1% rise. This marked the second straight month of increases in private sector credit.
Consumer price inflation rose to 5% in September from 4.9% in August, in line with market expectations. Main upward pressure came from fuel, electricity and owners’ equivalent rent. The annual core inflation rate edged up slightly to 3.2% in September from 3.1% in the previous month. There was no central bank meeting in October, the next meeting is scheduled for 18 November.