Economic Update 10-18-2021
- Economic data for the week included stronger-than-expected results for retail sales, while inflation continued to come in elevated for producer, consumer, and import prices. Job openings and jobless claims also continued to strengthen as labor markets show improvement.
- Global equity markets rose along with improving economic data, and inflation that came in no worse than expectations. Bonds also gained as long-term interest rates declined. Commodity prices continued to rise with prices for copper and other metals overtaking the energy story last week.
U.S. stocks moved higher last week, resulting in a bounce off the recent -5% minor correction beginning in September. Congress reached a deal to extend the debt ceiling from mid-October to early December, which markets cheered, but perhaps just prolonged the inevitable political showdown by a few more months. Inflation has persisted as a concern, echoed by several Fed members in their speeches, which may have helped again push interest rates higher.
By sector, energy stocks gained 5%, followed by financials and industrials. On the negative side, communications and health care experienced declines on the week. Real estate also fell back, in keeping with higher interest rates. Company earnings for Q3 will be released beginning this coming week with the usual large banks leading the way. Per FactSet, year-over-year earnings growth for Q3 is expected to be 28%, which would be the third highest pace since 2010 (but, of course, reduced from Q2’s trough-to-peak 91% pace). Then again, 2021 has shown a tendency of higher-than-average upward revisions.
Foreign stocks were mixed last week, with gains in the U.K. and emerging markets, while stocks in Japan declined, as government forecasts of growth were pared back. Influences were largely the same as in the U.S., with improving growth offset by persistent inflation risks and supply chain disruptions, such as the important car manufacturing industry in Germany. The Reserve Bank of New Zealand jumped on the train of hiking rates, by 0.25% to 0.50% last week, as did the National Bank of Poland, by 0.40% to 0.50%. Foreign central banks, with a more focused mandate on inflation and monetary stability only (not jobs) have started to discuss inflation concerns more meaningfully as of late.
U.S. bonds were pummeled again last week, as interest rates continued to creep higher—and the 10-year treasury again reaching the 1.6% mark. Investment-grade corporates fared a bit worse than treasuries and high yield, while bank loans ended the week as the only bond group providing positive returns (per their usefulness as a ‘bond hedge’). The dollar was little changed last week, with foreign bonds all losing ground as a result of rising rates alone.
Commodities rose several percent last week, with gains in energy and industrial metals offsetting a decline in agriculture. The price of crude oil rose by nearly 5% to just above $79/barrel, while natural gas prices settled back down by -1%. Energy markets are experiencing a bout of extreme volatility, particularly abroad. The OPEC+ group decided to increase production slowly, while the U.S. has pondered tapping into strategic petroleum reserves—done during periods of extreme supply tightness and price pain on consumers. Prices for natural gas in Europe have risen far above those in the U.S., with supply disruptions and higher-than-expected demand as the primary causes. (Europe is reliant on Russia for a sizable amount of its natural gas supplies, which obviously creates some geopolitical drama between the two regions. This gives Russia sizeable leverage on issues they care about, such as political influence in Ukraine, for example.) Unlike crude oil, which can be more easily stored and transported, natural gas is more closely tied to existing pipeline infrastructure, which makes transitions between different supply sources less feasible. One unfortunate irony is that high prices for petroleum, supply problems, or further restrictions on gas transmission for climate reasons can drive higher use of coal, which is abundant and cheap—albeit not climate-friendly.
|Period ending 10/15/2021||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.33||-1.72|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
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