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Market Commentary - September 2021

Posted: 29th September 2021   |   Share

By Sarah Ryman

Sarah Ryman News

Inflation pressures provide a challenge.

The OECD has adjusted forecasts for 2022 reflecting a continual rise in inflation over the next couple of years which exceeds previous forecasts for most G20 countries. What will central banks do to manage this?

UK

MPs voted by 319 to 248 to increase national insurance across the UK from next year to help to pay for the NHS and social care. Chancellor Rishi Sunak is trying to rein in public borrowing (national debt now stands at around 100% of gross domestic product) ahead of a Budget which is due to take place on the 27th October. 

Worker shortages continue to concern businesses with Marks and Spencer warning of ‘significant disruption’ to food imports from Europe. The CBI has warned that the shortages might be felt for the next two years. And, if there wasn’t enough to keep us on our toes, transport companies and UK medical workers have warned that the fuel crisis could have a detrimental impact on essential services following panic buying. Meanwhile, the Bank of England has gone against government rhetoric and ditched a requirement for staff to go into the office at least one day a week. 

Job vacancies have hit a new record this month as the economic recovery continues to pick up pace and furlough winds down. The Office for National Statistics (ONS) confirmed that the unemployment rate fell to 4.6% in the three months to July and the number of vacancies in the three months to August rose above one million for the first time since records began. 

UK inflation hit 3.2% in the year to August (from 2% in July) which is the biggest increase since records began in 1997 according to the ONS. The leap was largely attributed to higher food costs but has been highlighted as being “temporary”. The Bank of England have said this month that they expect inflation to peak at 4% and stay around this level into Q2 of 2022 but stressed that no immediate action was needed and left rates unchanged. However, it seems increasingly unlikely that they will take no action at all and dropped their previous guidance around not tightening policy until the economy had recovered materially from the pandemic. Andrew Bailey, governor of the Bank of England , has said that every member of the monetary policy committee was ready to raise interest rates before Christmas if needed to prevent higher inflation becoming persistent. With unemployment, labour shortages and the furlough scheme coming to an end at the end of this month they will likely need to keep a close tab on what to do when. 

EUROPE

Markets had expected the European Central Bank (ECB) to start to talk about tapering given the improvement in the economic outlook and a drop in financing costs. ECB President Christine Lagarde said ‘the lady isn’t tapering’ reassuring bond investors as the ECB said it would move to “a moderately lower pace” in its EUR 1.85tn pandemic emergency purchase programme (PEPP). She clarified that “ what we are doing with our latest monetary policy decision is recalibrating our pandemic emergency purchase programme just as we’ve done before”.

With Angela Merkel (a conservative leader of the Christian Democratic Union party) due to step down as Germany’s C hancellor imminently the battle for her successor has been fierce with a narrow win for the Social Democrats SPD confirmed this week. Olaf Scholz seemed to successfully target the many Germans who had backed Merkel, but didn’t have a strong allegiance to her party, by echoing some of her qualities as a unpretentious, calm, pragmatic leader. He now has the challenge of coalition talks to determine who governs the Eurozone’s largest economy. 

The rising gas and electricity costs are forcing European governments to consider aid for households and suppliers as concern over a deepening winter energy crisis builds. The fear is that such a surge in pricing could jeopardise an already vulnerable recovery in the area. 

US

The US plans to administer booster shots later this month according to plans outlined by Joe Biden in an attempt to curb the surge in C ovid-19 cases. The Biden administration will also demand that US companies force millions of employees to be vaccinated against Covid-19 or submit to weekly testing.

The US looks likely to start to reduce its massive pandemic stimulus programme despite a slowdown in US jobs growth last month. This sentiment was supported by James Bullard, president of the St Louis Fed and one of the longest-serving members of the Federal Reserve. Central banks in Canada, New Zealand and Australia have already started to taper. A poll of leading academic economists have said that the Federal Reserve will wind down stimulus quickly and raise US interest rates in 2022 in response to higher inflation. Nine officials on the Federal Open Market Committee now expect an US rate increase next year according to projections released this month. The tide seems to be shifting as only seven officials were forecasting a rise when they met in June of this year. It is also anticipated that the central bank will announce in November about starting to reduce the stimulus programme. 

OIL

Brent pushed back over $80 a barrel this month as fear spread over widespread fuel shortfalls into the year-end concern markets.

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