Week in Review: US Inflation Escalates

Consumer prices in the U.S. increased 6.2% in October, which was the largest year-over-year increase since 1990. The increase was well above the 5.9% estimate from economists polled by Dow Jones. On a monthly basis, the CPI increased 0.9% against the 0.6% estimate. Higher prices for energy, shelter, food and vehicles fuelled the higher reading. Core inflation, which strips out the food and energy sectors, increased by 4.6%. Alarmingly, October’s rise in inflation was more broad-based covering a wide array of categories, showing that the increase in prices is broadening out beyond reopening parts of the economy.

Escalating inflation could cause the Federal Reserve to tighten policy more quickly than it has signalled. The central bank recently communicated that it would start reducing the amount of bonds it buys each month, though officials have indicated that interest rate hikes are still off in the future.

Chinese leader Xi Jinping cemented his status in Chinese political history, as he enacted a so-called historical resolution. The resolution deemed Xi a pivotal historical figure, paving the way for him to remain in office for a third term and even longer.

The British economy grew a slower-than-expected 1.3% in the three months ended September 30, down from a 5.5% jump in the second quarter. The economy’s growth was impacted by rising infection rates and global supply shortages.

On Saturday the Dutch government announced that it will return to a partial lockdown after the government ordered restaurants and shops to close early in an effort to contain a rapid surge in COVID-19 cases. Nearly 85% of the adult Dutch population has been fully vaccinated.

The Liberal Democratic Party’s (LDP’s) Fumio Kishida was reappointed Japan’s prime minister after his party’s convincing win in the October 31 general election, the LDP’s convincing election win leaves Kishida well placed to push ahead with fiscal stimulus to boost Japan’s pandemic-hit economy.

Heightened inflation fears impacted the three major U.S. indices with the Dow Jones (-0.38%), S&P 500 (-0.31%) and the Nasdaq (-0.69%) all ending in negative territory for the week. Shares in Europe edged higher over the week as ultra-loose monetary policy allayed rising inflation and coronavirus concerns. The pan-European STOXX Europe 50 Index gained 0.17% while the UK’s FTSE 100 Index advanced 0.60%. In Asia, Japan’s benchmark Nikkei 225 Index was flat over the week while China’s Shanghai Composite Index gained 1.36% amid speculation that Beijing would announce easing measures to help indebted real estate companies.

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Market Moves of the Week

In South Africa, the 2021 medium term budget policy statement (MTBPS) was delivered by the Finance Minister Enoch Godongwana on Thursday. The MTBPS was generally well received by financial markets as policy continuity and fiscal consolidation remained the cornerstones of South Africa’s financial recovery plan. The South African economy is now expected to grow by 5.1% in 2021 from a 6.4% contraction in 2020.

Positively, government has estimated a near-term revenue overrun of R120.3 billion for FY21/22 on elevated terms of trade (higher export prices relative to import prices) and better export earnings. The closely monitored Debt to GDP ratio is also projected to decline marginally this year to 69.9% from 70.7% before rising to 77.8% in 2024/25, with a peak debt ratio of 78.1% in 2025/26.

The FW de Klerk Foundation confirmed that FW de Klerk (85), who was the last apartheid president, died on Thursday morning. In March this year, de Klerk announced that he had been diagnosed with a form of cancer, mesothelioma.

In corporate news, Richemont shares jumped over 10% on Friday after it published forecast-beating results. The Swiss luxury group also announced that it is in “advanced talks” with online retailer Farfetch and other companies over a deal to invest in its lossmaking Yoox Net-a-Porter ecommerce business.

The JSE hit a record high on Friday, with the all share index nearing the 70,000-point level, as investor sentiment was buoyed by an improved economic backdrop delivered in the SA medium-term budget policy statement. The JSE All Share Index ended the week up 3.09%, led higher by the resource (5.42%) and industrial (3.74%) sectors. By Friday close, the rand was trading at R15.32 to the U.S. Dollar, weakening by 1.88% for the week.

WeeklyMovements (13)
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Chart of the Week

As per the above chart, traders have turned more hawkish on rate hikes, with the market now pricing in an over 40% probability of the first rate hike by the end of 2022. The market is anticipating at least two and possibly three hikes in 2022, compared to maybe one in the latest Fed forecast. The increase comes with inflation as measured by the consumer price index increasing 6.2% year over year.

US Inflation

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