Bassanese Bites: Coiled cobra – October 25 2021
Global markets
Global equities continued their impressive rebound last week, with strength in the Q3 U.S. corporate earnings season offsetting concerns with regard to supply chain bottlenecks, inflation and interest rates. According to FactSet, an above-average 84% of the 23% of U.S. S&P 500 companies that have reported so far beat expectations.
One takeaway from the high level of earnings ‘beats’ is that companies appear to have been able to pass on cost pressures – hence the lift in both wholesale and retail prices over recent months. And the earnings season heats up with the tech darlings – Amazon, Apple, Alphabet and Google – reporting this week.
That said, interest rates still edged higher last week and both the Fed’s Beige Book and U.S. manufacturing reports indicated persistent supply and cost pressures. Indeed, Fed chair Powell was forced to concede on Friday that inflation pressures may last a bit longer than anticipated, which he indicated affirmed the need to start tapering bond purchases (but not, it seems, actually lift official interest rates any time soon).
As noted above, earnings will remain centre stage in the U.S. this week, though key inflation and wage indicators are also released on Friday which could dampen sentiment if one of both surprise on the upside. Annual growth in the core personal consumption expenditure (PCE) deflator is expected to edge up to 3.7% from 3.6%, while annual growth in the Q3 wage cost index is expected to lift to 3.3% from 2.8%.
Like many, I still suspect what we’re seeing is persistent cost pressures arising from a stimulus and pandemic-induced surge in goods demand running ahead of supply capacity, coupled with million of U.S. workers – for various reasons – still reluctant to re-enter the workforce. While these distortions should ease over the coming year, it remains a question whether the Fed and/or markets will lose patience in the meantime – bringing forward rate hike talk and a then likely renewed equity pullback. Once the current U.S. earnings euphoria has passed, U.S. bonds yields seem a bit like a cobra – coiled up and potentially ready to bite!
Equity themes
Growth just edged out value again last week, with the U.S. market handily outperforming other markets. That means the U.S. relative performance trend is still up, with value and emerging markets (and Australia) not yet convincingly displaying an outperforming bias.
