October 01, 2021Money Financial literacy In the news News Weekly update Weekly commentary
What's Happening Today
Back in July, the temperature was up and Covid cases were down. Nevertheless, the Canadian economy contracted 0.1% during the month, in line with our forecast, but slightly better than what the consensus had expected. While restaurants and bars were rocking again, as were businesses in the arts, entertainment and recreation sector, other parts of the economy were sagging. Heatwaves in Western Canada negatively affected crop yields, while the summer slowdown in the housing market saw residential construction down. Ongoing supply chain disruptions also seem to have hit the manufacturing and wholesale sectors again in July. That said, early indications suggest that the economy showed more signs of life in August, with Statistics Canada's flash estimate showing a gain of 0.7% for the month. Restaurants and bars continued to gain ground, but drought conditions limited crop production again. While these numbers were largely in line with our expectations, revisions seem to have weakened the path here. As a result, it looks like GDP is tracking below our 4 1/2% forecast for Q3. The knee-jerk reaction towards higher yields on the back of the solid readings for July and August has now reversed given the weakness in the revisions.
Looking at the States, Congress has avoided a shutdown due to the passage of the continuing resolution. The deal will set spending at current levels into December; this will allow lawmakers to hash out a full-year funding plan. The deal does not make long term provisions regarding the debt ceiling. Note Yellen stated yesterday at the House Financial Services Committee that she would support a permanent repeal of the debt limit, as opposed to the temporary suspension under consideration now. This appears to be something of a conversion from some of her earlier views when in charge of the Fed. While a shutdown may have been averted, President Biden’s fiscal plans continue to be stalled, largely by his own side. Moderates Manchin and Sinema continue to balk at the costs of the USD3.5trn deal, unless and until they get on side their dissent will preclude the use of budget reconciliation. Meanwhile the Democratic progressives will hold up the infrastructure deal in the House unless the reconciliation package is passed first. Getting a deal which both the progressives and moderates within the Democratic party can sign up to remains a tough ask. Expect the negotiations to continue as the positions of the two-sides appear increasingly entrenched.
Across the pond in the Eurozone, German inflation registered a 41-year high, and we have seen the flash Eurozone metric register the highest reading since September 2008 at 3.4%. The 0.5% monthly gain represents the largest increase in five months. While annual headline prices have climbed from -0.3% since the turn of the year, core prices have remained rather better behaved. The September reading was in line with expectations at 1.9%. The ECB will likely continue to underline that core prices remain broadly under control and that allows the ECB plenty of latitude as regards policy action. While the ECB continue to view inflationary pressures are being transitory, supply issues appear to be materially impacting manufacturing PMI. Although final manufacturing PMI may have come in a tick higher than the flash estimate supply issues are proving to drag on the series, delays and shortages are at levels not seen in almost a quarter of a century. We continue to expect the ECB to follow through with their lower for longer mantra. However, we can expect an increasingly fractious policy debate at the December meeting as updated staff forecasts will further test the inflation is transitory narrative.
Meanwhile, in the UK: Although the headline PMI number was better than expected, the series has retreated for four straight months. Exports shrank for the first time in eight months while the growth in jobs was the weakest since January, this comes as small companies are now cutting staff. The retreat in manufacturing sentiment comes as the latest survey from the UK Institute of Directors (IOD) suggests optimism has retreated to levels not seen since the winter lockdown, this comes as the survey references sentiment falling ‘‘off a cliff.’’ Confidence has plunged from +22 to -1 in September. With costs rising much faster than revenues, IOD members are increasingly pessimistic. Rising fuel prices, tax hikes into the new financial year and the ending of furlough, approximately 1m workers came off the jobs support mechanism yesterday, suggests that a market pricing in nearly 5bp of tightening for the 4 November MPC meeting appears materially overdone. The Telegraph newspaper, the former employer and key cheer leader of the PM Johnson, is now musing whether his legacy could prove to be stagflation. While we are not expecting a repeat of the 1970’s yet, consumer headwinds into Q4 are surely set to compromise near term BoE rate hike expectations.
Shifting to Japan, today marks the first day in six months that no Japanese prefecture is operating under state of emergency. The removal of restrictions, in line with falling infection levels and rising vaccination rates, should encourage a consumer rebound into Q4. Alongside the presumption of an acceleration in consumption we have seen an unexpected advance in the quarterly Tankan index, this comes as the large manufacturing component accelerated to +18. A fifth straight gain in the series comes as large manufacturers boost investment plans. Large manufacturers have increased their budget rates to 106.72 compared to 105.57 in Q2. In view of the cheaper JPY we would expect exporter profit expectations to benefit encouraging a positive recovery narrative into year-end.
Finally, ahead of Monday’s gathering of oil producers there is increasing speculation that the group will consider releasing more oil to the market to preclude price rises compromising global growth assumptions. While October volumes have already been agreed there has been chatter that the previously agreed increase of 400,000k bpd could be doubled in November, perhaps for one month only, in an effort to boost inventory levels. A potential catalyst for any adjustment comes via the OPEC+ Joint Technical Committee having reduced the size of the expected surplus in 2022.
As always, please give us a call if you have any questions or if you’d like to book a review.