Global Economy & Markets, Weekly Roundup 02/11/21

02/11/2021 - Reports

Global Economy and Markets

The Federal Reserve is set to begin removing accommodation, with the S&P500 recording new all time highs in the past week
Key Takeaways

Monetary policy will remain in the spotlight in the current week, as major central banks appear poised to start withdrawing part of the monetary accommodation. In the event, the Federal Reserve (November 3rd) is expected to announce a reduction in the pace of asset purchases (QE tapering), with the first step coming in mid-November or early in December.

The most likely tapering pace, remains a reduction by $10 billion for Treasury Securities and $5 billion for agency mortgage-backed securities, each month, from a current pace of $80 billion and $40 billion, respectively per month, ending large-scale net asset purchases by mid-2022. 

Furthermore, the Bank of England (November 4th), is expected to increase the Bank Rate, to impede the rising inflation from feeding through to higher medium-term inflation expectations. Markets (according to sterling overnight index swap rates) price-in a rise from +0.10% to +0.25% and thereafter suggest that the Bank Rate will have risen to 1.25% by the end of 2022.

The European Central Bank (ECB) stood pat (interest rates, QE) in the past week. President Lagarde expressed the view that the baseline endpoint of PEPP (March 2022) will be met. Respective decisions are planned for December 16th.

The ECB maintains the view that the ongoing inflation pressures, despite likely proving more lasting than initially thought, will eventually ease in the course of 2022. Notably, the reference that inflation is anticipated to be “largely temporary” was removed from the introductory statement.

US real GDP growth eased considerably in Q3:2021, up by 2.0% qoq saar (+4.9% yoy), following a +6.7% qoq saar growth in Q2. Personal consumption was better-than-expected (+1.6% qoq saar vs. consensus of +0.9%) but nonetheless slowed from Q2 (+12% qoq saar) due to semiconductor-related declines in autos (-53.8%) and Delta-induced deceleration in some services categories (Recreation Services, Food services and accommodations). Supply chain constraints also weighed on several categories, including transportation equipment (-18.5%), information processing equipment (-5.9%), and residential investment (-7.7%).

In the US, the earnings season is well underway with strong EPS and sales surprises supporting equity prices (see graph below). For the S&P500 (with 296 companies having reported so far), 82% have surprised positively (75% for sales), with EPS growth at +37% yoy. For 2021 and 2022, EPS growth expectations are for +45% and +8%, respectively.

Four factors have dominated earnings calls, so far: (i) Inflation and supply chains pressures; (ii) pricing power (net margins remain near record levels of 13%); (iii) strong consumer demand for non-durable goods; and (iv) the shift in consumer behavior towards a more digital world.

Elevated consumer demand, a tight labor market, and Covid-19 outbreaks have combined to put unprecedented pressure on global supply chains. The strained supply chain has driven increases in logistics costs and delivery speeds and has also challenged the ability for goods producers to source input materials at reasonable costs. Note that the term "supply chain" has been uttered about 4,000 times in investors’ earning calls this year from c. 2.000 in 2020.