United States: Inflation is only heading in one direction…

The Federal Reserve has announced that they will be slowing the pace of QE asset purchases this month with the programme set to be concluded before the end of 2Q 2022.

Officials have been at pains to state that this does not mean they will then swiftly be moving to interest rate increases, but we strongly suspect that the data flow will force the Fed’s hand. The economy is rebounding strongly following the 3Q Covid related slowdown and inflationary pressures are now mounting. This week’s CPI data is likely to show a re-acceleration in annual inflation to 5.8% for the headline rate (the highest since December 1990) and to 4.4% for core (ex-food and energy).

Surging housing costs, labour costs, energy costs and second-hand car prices are likely to mean headline inflation then pushes above 6% in December, with core inflation moving above 5%. The Federal Reserve assumes that inflation will fall sharply in 2Q and 3Q next year, but we are wary that labour market shortages, production bottlenecks and supply chain issues could last well into next year and in a strong growth environment, inflation could stay higher for longer. We wouldn’t be surprised to see QE tapering concluded more quickly and we continue to look for two interest rate increases in the second half of 2022.

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In the absence of high-tier macroeconomic data releases, markets started the new week in a quiet manner and investors will keep a close eye on central bank speakers on Monday. FOMC Chairman Jerome Powell will deliver the opening remarks at a virtual conference titled ‘Gender and the Economy Conference’. New York Federal Reserve President John Williams, Fed Vice Chair Richard Clarida, Fed Governor Bowman and Bank of England (BoE) Governor Andrew Bailey will also be speaking later in the day. Meanwhile, the 10-year US Treasury bond yield, which lost nearly 10% in the second half of the week, is trying to stage a rebound toward 1.5%. Late Friday, US Democrats passed a $1 trillion infrastructure bill.

Other data includes consumer confidence, which should improve given the waning Covid numbers and strengthening incomes, although rising gasoline prices and a general concern over the rising cost of living could limit the improvement.

Brexit is back…

There’s a new drama for UK markets to contend with, now the excitement of the Bank of England’s November meeting is behind us. Brexit is creeping back into the headlines, and while there’s been an undercurrent of political noise all the way through 2021, there’s a growing risk that tensions will translate into concrete actions. The UK government appears poised to trigger the Article 16 clause in the Northern Ireland protocol, agreed back in 2019, which would allow the UK government to suspend parts of that deal. How the EU reacts to such a move would depend on exactly how much of the NI agreement the government decides to suspend.

GBP/USD suffered heavy losses following the BoE’s decision to leave its policy rate unchanged last week. In an interview with Bloomberg TV, Governor Bailey said that it’s not their job to guide financial markets on interest rates. With the BoE event out of the way, investors will shift their attention to headlines surrounding Brexit talks.

South African Medium Term Budget Policy Statement

When South Africa’s new finance minister, Enoch Godongwana, delivers his first Medium-Term Budget Policy Statement (MTBPS) on 11 November 2021, he will need to focus on business-friendly policies that stimulate sustainable economic growth to ensure that South Africa avoids real fiscal difficulty over the next two to three years, according to wealth management experts, Citadel.

“Looking at where we are right now, we don’t really see big announcements regarding tax changes or any other policy changes, so it’s likely to be more of an update, and an indication of what we can expect when the National Budget Speech is delivered in February,” he said. Citadel chief investment officer, George Herman agrees: “The MTBPS is often more about policy than nitty-gritty numbers, but it does tell the market where the governing party is taking our finances.”

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Sanisha Packirisamy, an economist at Momentum Investments, along with Herman van Papendorp, head of investment research & asset allocation at the group, have identified eight things to look out for in the MTBPS:

1.Commodity price windfall boosts revenues

2.Improvement in fiscal and debt ratios

3.Treasury’s resolve to restrain spending tested

4.Upside risk to the public sector wage bill

5.Unbudgeted bailouts

6.Momentum behind structural reforms

7.Fiscal responsibility pays off

8.Implications for SA’s sovereign rating

All of the above are key factors which could either make or break the local currency. At the moment the ZAR has clawed some of the losses of the past week back, trading back above R15/US$ at the time of writing. The budget could be a catalyst for a push above the all important R15,50/$ should investors not receive the MTBPS well.

Cryptocurrencies: Following a two-week consolidation phase above $60,000, Bitcoin regained its traction and broke above $65,000 on Monday. The all-time high for BTC sits at $67,000. Ethereum preserves its bullish momentum at the start of the week and trades above $4,700 briefly printing a new high of $4,800. The door is now ell and truly open for $75-$85k which was our yearly target at the beginning of 2021.