Global equity markets sold off sharply towards the end of the month following news of a new Covid-19 variant, termed omicron by the WHO, having been identified by South African scientists. This followed on from a relatively volatile month, as investors continued to weigh solid economic data and good earnings numbers from companies globally against the threat of higher inflation and the possible knock-on impact on monetary policy.
Bond yields globally pushed upward for most of the month. Emerging market yields spiked in response to omicron, while safe havens came down in response to the discovery of the new variant.
26th October to 26th November 2021
• China continues to cloud the emerging market investment case given the uncertainty on future policy dynamics. However, selected countries within the emerging market bucket like Indonesia are one of the few economies’ growth rates forecasted to accelerate next year as the region continues to catch up on the vaccination front and ease lockdown restrictions.
• Precautionary savings will likely continue unwinding, although consumers’ spending power should be relatively lower compared to the first half of the year.
• The dovishness of other Central Banks such as the ECB compared to the US has helped increase the relative attractiveness of the dollar. At this stage, we have a neutral view on a trade weighted basis, particularly due to the resurgence of Covid-19 cases in Europe.
• Monetary policy is expected to remain accommodative until the end of the year, however, the reduction in asset purchases by the US Federal Reserve heading into next year will likely lead to less supportive liquidity dynamics.
• Inflation is expected to continue rebounding 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 expect economic growth to be relatively robust.
In the US, data was mixed, and inflation remained a persistent theme
On a preliminary basis, the IHS Markit Composite PMI for the US declined to 56.5 in November from 57.6 in October. This was below expectations and signaled a slowdown in output growth. The trade deficit widened to a new record high of $80.9 billion in September, slightly ahead of the estimated $80.5 billion, as exports fell 3% m/m while imports edged up a further 0.6% m/m. On the flipside, retail sales increased 16.3% y/y in October, well above forecasts. The unemployment rate fell to 4.6% last month – the lowest since pre-pandemic levels in March 2020. This was below market expectations of 4.8%, as the labour continued to recover amid an increase in demand for labour. US Annual inflation surged to its highest level in over 30 years at 6.2% in October 2021. This was above the forecasted 5.8%. US Federal Reserve officials stated that the Central Bank would be prepared to adjust the pace of asset purchases and raise interest rates sooner than anticipated if inflation continued to run high. They also indicated an increase in uncertainty around the inflation outlook and suggested that significant price pressures could last longer than anticipated due to persistent supply bottlenecks.
Eurozone data was neutral to positive
Initial estimates showed the IHS Markit Eurozone Composite PMI rose to 55.8 in November, well above market expectations of 53.2, signaling a recovery in business activity. Consumer confidence deteriorated by more than expected. The trade surplus narrowed to €7.3 billion in September 2021, from €24.1 billion in the same month last year. This was below the market consensus of €10.7 billion as exports rose 10% y/y while imports climbed at a faster 21.6% y/y. The seasonally adjusted unemployment rate in the Euro area edged down to 7.4% in September, slightly below expectations. The number of unemployed persons decreased ~255 000. Annual inflation remained in line with estimates at 4.1% y/y in September – the highest since the global financial crisis in 2008. Policy makers indicated that the European Central Bank’s generous monetary policy support to the economy would need to be reassessed at some point in the future considering the improved inflation outlook. Officials also concurred that recent price pressure was expected to be more persistent than previously anticipated.
The UK recovery remained on track, but unemployment and inflation continued to bite
Britain's gross domestic product grew 5.3% y/y in September, below a downwardly revised 6.6% rise in the month before. This was just below market expectations of 5.4%. According to preliminary reports, the IHS Markit/CIPS UK Composite PMI edged down to 57.7 in November, from 57.8 in the previous month. This was above the forecasted 57.5 as new order intakes increased and business spending improved robustly. The GfK Consumer Confidence Index rose to -14 last month, compared to expectations of -16. Retail sales volumes decreased 1.3% y/y yet again in October, above the market consensus of a 1.6% decline. The UK’s trade deficit widened to £2.8 billion in September, from a downwardly revised £1.9 billion. This was above forecasts of ~£3.4 billion, as imports rose 2.9% while imports advanced at a slower 1.2%. The unemployment rate declined even further to 4.3% in the three months to September 2021 but was still below market expectations. Annual inflation jumped to 4.2% y/y in October – the highest since December 2011. This was above the forecasted 3.9%, with upward pressure coming from the cost of housing and utilities. Yet again, the Bank of England held its benchmark interest rate at a record low of 0.1% and kept its bond-buying program unchanged. The Central Bank also said it is likely to increase rates over the coming months to return to the 2% inflation target.
China’s economic statistics generally topped estimates
China’s composite PMI for October inched higher to 51.5, for the second consecutive month of private sector grow as sporadic coronavirus outbreaks in various parts of the country were contained. This was above expectations of 51. Retail sales rose by 4.9% y/y, following a 4.4% gain in the month before, and beating forecasts of 3.5%, as consumption remained strong. China's trade surplus surged to a record high of $84 billion in October, easily ahead of the market consensus of $65 billion. This was yet again the largest trade surplus since December 2020 as exports saw double-digit growth for the thirteenth month running. In line with expectations, China’s surveyed urban unemployment remained unchanged 4.9% last month. The annual inflation rate shot up to 1.5% in October, from 0.7% a month before and ahead of the forecasted 1.2%. This is the highest since September last year, owing mainly to a sharper rise in the cost of non-food products.
Japan’s data pointed to an improvement in underlying activity
As shown by flash estimates, the Jibun Bank Composite PMI reading for November was up to 52.5, from a final 50.7 in the previous month. This was ahead of expectations and signaled the second straight month of growth in private sector activity. Retail sales fell 0.6% y/y in September 2021, compared to a forecasted drop of 2.3%. Japan posted an unexpected trade deficit of ¥67 billion last month – missing market estimates of a ¥310 billion surplus. This was the third straight deficit as exports rose 9.4% y/y while imports jumped 26.7% y/y. The unemployment rate was once again unchanged at 2.8%, as expected, with the number of unemployed persons falling ~20 000. 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 October meeting, as widely expected. Policymakers maintained a bleak view on exports and factory output, as supply-chain disruptions continued.
In South Africa, economic data was mixed
The RMB/BER Business Confidence Index remained flat at 43 in Q421, amid concerns over recurrent power cuts and rising inflationary pressures due to supply chain issues. The composite leading business cycle indicator dropped 2.3% in September, reversing from a 0.7% rise in August. The IHS Markit PMI fell to 48.6 in October, the lowest since July, from 50.7 in the previous month, pointing to a renewed contraction in the private sector. The trade surplus narrowed to R22.2 billion in September from a downwardly revised R42.3 billion in August. Retail sales rose by 2.1% y/y in September, following an upwardly revised 1.5% fall in August and against estimates of a 0.2% drop. The value of recorded building plans passed rose 28.6% y/y in September, the eighth straight month of increases. Mining production shrank 3.4% y/y in September, missing estimates of a 2% rise. It was the first decline in mining activity after 6 consecutive months of growth. Manufacturing production rose by 1.3% y/y in September, beating market expectations. Producer prices jumped by 7.8% in September, up from 7.2% in August and above market expectations of a 7.3% rise. This was the highest rate since February of 2016. Consumer price inflation stood at 5% in October, unchanged from the previous month. The annual core inflation rate stood at 3.2% in October, also unchanged from September. The South African Reserve Bank raised its benchmark repo rate by 25 bps to 3.75% at its November meeting. It was a close call; 3 members voted for a hike, versus 2 members for no change. This was the first hike in 3 years due to increased inflation risks and despite a fragile recovery. The Central Bank’s QPM model indicates further increases in each quarter of 2022, 2023 and 2024.
The medium-term budget review was also presented in November. Government cut its budget deficit outcome to 10% of GDP in 2021/21 fiscal year from 14% in February, mainly due to better tax collections from mines, as well as the higher rebased GDP number. The deficit is expected to fall to 7.8% the following year, from 9.3% in their previous forecast in February. Gross debt is projected to peak at 78.1% in 2025/26 versus 88.9% earlier. Implementation risk remains high.