Weekly View – Central Bank Halloween

Last week, the US GDP growth figure for Q3 came in lower than expected, while prices moved higher than anticipated and the US Employment Cost Index update rose at its fastest pace in 31 years. The headline increase was driven by the biggest surge in wages since 1982, up 1.5% in the third quarter. Substantial productivity gains would be required now to offset this rise in wages. Without gains in productivity and/or a fall in labour costs, there could be a risk to the Fed’s message about “transitory” inflation pressures. We expect the Federal Reserve to announce plans to taper its quantitative-easing programme following its meeting this week. Meanwhile, Christine Lagarde last week pushed back on market bets on rate hikes, meaning the European Central Bank is likely to leave rates unchanged. Yet markets have begun to test central banks’ resolve on this front. Last week, the two-year Australian government bond yield surged far beyond its target after the central bank declined to defend it. We are underweight sovereign bonds. Elsewhere, Brazil’s central bank surprised markets with a 150 bps rise in its reference rate in an effort to combat inflation. But the move failed to stabilise the Brazilian real. We prefer developed- over emerging-market equities. 

In third-quarter earnings, some positive surprises, including big buyback announcements, have supported markets. Big tech earnings have been mixed, however, with those companies exposed to semiconductor and labour shortages lagging. As a result, the earnings-per-share beat declined from the previous week, indicating a loss of momentum in positive revisions. After excluding the financials sector, the Q3 reporting picture is even less rosy, with stagnating margins. We are neutral equities.

US president Biden is struggling to find congressional approval for a fiscal plan that has already seen its price tag halved to USD1.75 trn. So far, it has been proposed that a wealth tax and a minimum 15% corporate tax rate could finance the bill. The chances of a higher corporate tax rate in 2022 therefore look quite slim for now, which could deliver a positive surprise for 2022 corporate earnings growth. Elsewhere over the weekend, the ruling LDP party won Japan’s general election, with new PM Fumio Kishida securing enough of a majority to pursue fiscal expansion plans. We are positive on Japanese equities. In the weeks ahead, we hope world leaders at COP26 in Glasgow will agree to solid actions to significantly reduce global greenhouse-gas emissions to keep global warming at 1.5 °C.