Ear to the Ground

December 23 2021

For those who enjoy a biscuit with their cuppa they may be wise to stock up now. McVitie’s became the latest company to warn customers that the price of their products could rise, with an increase as much as 5%, to accommodate rising business costs, supply chain issues and staff shortages. McVitie’s believe they have never seen a combination of challenges like this at the same time.” This comes at a time when global food prices, by reference to the UN Food, Agriculture World Food Price index, have soared to their highest level since 2011.

Although euro area inflation now stands at 4.9% year on year in November, the highest reading since July 1991, the ECB are keeping their foot to the floor in terms of expanding their balance sheet. This week it hit an all-time high of €8.5bn. This is now equal to 81.6% of eurozone GDP. Despite the pick-up in inflation we are yet to see a sustained period of outperformance of value stocks versus growth stocks in the US. There have been brief periods where we have seen value outperform, notably between October 2020 and April 2021, but more recently growth stocks have reasserted themselves. Value versus growth in the US is now at its lowest level on a total return basis since 1975.

This, coupled with bond yields being lower than would be expected given the current levels of inflation, can perhaps be attributed to forward expectations. Looking at US 5 year/5 year breakeven rates, which shows us what inflation breakeven’s are expected to be in 5 years from now, we can see that these are only modestly higher since the beginning of the year. Indeed since the start of 2020, where the expectation of inflation in 5 years’ time was just over 2%, compared to around 2.5% now.

This week also saw the release of the final 3rd quarter figures for economic growth for the UK. The economy grew by a lower than previously thought 1.1% quarter on quarter, lower than the previous estimate of 1.3%. Year on year the economy expanded by 6.8% to the 30 September, the economy now 1.5% below its pre-pandemic level in the final quarter of 2019. Drivers of growth in the quarter were household consumption, hospitality, arts and recreation. The US also released its final figures for Q3, the economy growing by 2.3% annualised in the quarter. Key drivers here were personal consumption expenditures. These figures are very much lagging indicators however, especially as we are almost at the end of the fourth quarter, and therefore had little impact on the market.

Looking east, this week we saw an uptick in the China Credit Impulse after a sustained period of reduction. This is a measure of change in new public and private credit as a percentage of GDP. This historically has marked turning points in economic activity. Given this tends to be a lead indicator for the ISM Manufacturing index, this is perhaps one to watch for 2022 for signs of a pick-up in economic growth.

As we head towards 2022 there is much to watch, listen, read and digest. Dissecting, so that you can conclude what you believe will give you the clues needed, as always will be important. To quote Bill Nye, “Everyone you will ever meet knows something you don’t.” Enjoy your Christmas and remember, purchase those biscuits now.

This article is for information purposes only and should not be construed as advice. We strongly suggest you seek independent financial advice prior to taking any course of action.

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