Week ending 15th October 2021.

Unfortunately, the minutes from the last Fed monetary policy meeting (held on 22nd September 2021), didn’t reveal much new information: in line with recent comments, the minutes confirmed that policymakers have all but settled on a plan to taper its QE program (currently running at $120bn in monthly bond purchases), starting in mid-November or mid-December.

Interestingly, despite the fact that policymakers aren’t expecting the current supply-disruptions and bottlenecks to be fully resolved until next year, policymakers stressed that economic conditions were likely to keep interest rates low over the next couple of years due to “sustained downward pressure on inflation in the years ahead”.

Thankfully, this confirms our views: just because inflation has risen sharply, it doesn’t mean it will persist. Yes, the recent increase in inflation has been greater than we expected (thanks to the recent spike in energy prices), but for inflation to remain elevated would require the current supply chain issues to continue to worsen and not get resolved.

Additionally, policymakers believe that the US is still far from full employment despite the official low unemployment rate as total US payrolls are 4.97m less than pre-coronavirus levels (the labour force participation rate has not been helped by coronavirus infections; childcare issues caused by school disruptions; and unemployment benefits to name a few) – and as these people come back into the workforce, wage pressures will ease.

And on cue, Thursday’s (14th October 2021), weekly jobless claims data showed initial claims fell to 293,000, while continuing claims fell to 2.59m – both readings were the lowest since 13 March 2020 – and provides us with confidence that the US employment market is still improving.

Furthermore, US PPI data came in lower than major economist’s expected – suggesting to us that inflation isn’t about to run away.

Looking ahead to the coming week we have: US & Chinese industrial production; US housing data; UK & Japanese CPI; UK & Chinese retail sales; Chinese Q3 GDP; and Eurozone PMI.

Investment Management Team