Whilst standardised inflation data for the UK actually fell in September, all signs show that the Bank of England (BoE) is contemplating an imminent increase in interest rates. Certainly, the Gilt market thinks so and (despite a fall on Friday) yields have risen more than 320% since this time last year. This may start feeding through into a higher cost of borrowing.
September’s fall in inflation doesn’t take account of the surge in petrol prices and household energy costs which will directly feed into the data when October’s inflation figures are announced. The BoE may well buckle under pressure of these figures and raise rates.
In my humble opinion, that would be a mistake as the UK economy remains fragile and it would certainly spook the equity market. We will have to see how things unfold; this key lever to shape economic output has really only one direction to go from its historic low level – the timing to any increase is critical. Many of the normal economic signals that would inform the BoE are being partially masked by stag/reflation, as well as a litany of other external forces, and any changes they make during this period may well fall into the category of “art” rather than science.
Damage has already been done in the Mid-Cap space which is more reflective of the domestic “real” economy and, quietly, the Mid 250 index fell some 7% from peak over the last 6 weeks – though it has begun to rally since.
Back to the real action, and it was a good week for equity investors as most company earnings came in higher than expected. The S&P 500 tested new highs, with the tech-heavy NASDAQ not far behind… before disappointing results from Intel and Snapchat spoilt the party.
Several individual technology stocks rose to all-time highs last week and Tesla shares extended their rally – shares surged after posting record profit and revenue, along with strong margins. Netflix, eBay and Microsoft also touched new all-time highs during Fridays’ (22.10.2021) trading session.
Despite blips in the tech sector, the overall earnings season has been very good so far, boosting the broader market back to an all-time high following a two-month lull. Still, things may still seem a little uncertain for investors looking toward the end of the year.
Headwinds are in plentiful supply – cost pressures, labour shortages and commentary from company management on earnings calls. FED chair, Jerome Powell, also seems to be turning more hawkish in the face of unrelenting inflation data. Strong jobs data added to the pressure on the Central bank to commence asset purchase tapering.
Over in Asia, investors’ fears of a Chinese property crisis were eased somewhat with the news that Evergrande has been able to settle a key interest payment that was due to foreign bondholders, staving off (at least for now) a default for the property developer.
Author: Tom McGrath.
This financial market commentary is for the week commencing Monday 25th October 2021.