The global economy is on the mend
Mark Richards, Strategist and Fund Manager, Multi-Asset, says any tightening of monetary policy by global central banks should be seen more as withdrawal of extremely accommodative policies rather than the start of a hiking cycle.
Global growth is seeing a continuation of the ‘stop/start’ recovery we’ve had for the past 12 months, with a hawkish shift across quite a few central banks. Currently, we’re sticking to our view that Q4 should accelerate materially from Q3 as delta-related lockdowns and supply chain bottlenecks abate.
Some of the data points for October, including a more complete set of PMI numbers and the ISM data from the US, support this thesis but there are some challenges as well. One challenge to our view is that October saw a sharp fall in US manufacturing new orders, but given that supplier delivery times lengthened further we think the drop in demand is reflecting supply chain bottlenecks rather than underlying weakness.
Output is rising very strongly in several Asian economies that are key to the global economy. China remains the obvious exception with continued weakness related to forced lockdowns as well as the troubles surrounding the real estate sector. Across the US, Europe, Japan, Australia and Sweden, employment components rose strongly for both manufacturing and services sectors. If companies are seeing a very sharp slowdown in new orders, it would be very surprising that they would be increasing employment at the same time.
The other notable data point of the last few weeks is the sharp rise in the US Employment Cost Index, which will get the Federal Reserve’s attention as it’s their preferred measure of wage inflation. But we don’t think the Fed will follow the path of other central banks in moving towards a more hawkish tone just yet, as they’ve so far been very successful at disentangling tapering from raising interest rates.
We’ve seen the likes of the Bank of England, Bank of Canada and the Reserve Bank of Australia move towards a less accommodative policy stance, prompting a big shift in front-end rate pricing over the last month. The question is whether this could be the start of a hiking cycle, or just a removal of very extreme accommodation. We think it’s probably the latter for now.
The weak September jobs report and some of the soft survey data may give the Fed pause and allow them to maintain some optionality until they get the tapering announcement out of the way. We do think there is a risk of more hawkish move, but probably in Q1 2022. By that time, there should be more evidence of a Q4 2021 acceleration, stickier wage inflation and core CPI inflation.
Will Japan’s consumption rebound endure?
Dan Carter, Fund Manager, Japanese Equities, looks at the results of Japan’s recent election and the potential legislative focus of Prime Minister Kishida. Could stimulative policies break Japan’s cycle of weak consumption, or will demographics continue to be destiny?
Last weekend’s general election in Japan produced few surprises. It was notable, however, that the ruling LDP party lost fewer seats than was expected. With 261 seats the LDP has enough for a majority that, in combination with coalition partners Komeito, they should have no problem passing legislation through the National Diet.
In advance of the election, the rhetoric from the new Prime Minister, Fumio Kishida, had caused some concern in markets – particularly a mooted increase in capital gains tax – but he seems to have since backed off. He has focused more on signalling stimulative policies, but the prospect of fiscal stimulus in Japan isn’t something that excites us. Japan’s problem isn’t a paucity of money in the system, it is that people don’t spend it – such packages have tended in the past to have little impact on the real economy.
Japan’s aging population has naturally led to a shrinking of the workforce – one might expect this to translate into wage growth but in fact that hasn’t really been the case so far. Politicians view this as a social ill, and proposed policies to address it include offering tax breaks to companies that raise wages.
All of these things increase the market’s view that consumption will be healthier in future. Again, our own view is rather more cautious, at least over the long term due to the powerful demographic trend which is a headwind to consumption growth. In the short term, however, a meaningful bounce in consumption is probably likely. Evidence for this can be seen in the widening gap between relatively bullish consumer confidence and actual consumption, indicating that people have wanted to spend more than they’ve been allowed to by the Covid-induced state of emergency (which ended only a few weeks ago). So by all means expect better consumption data in the months to come, but investors in Japan shouldn’t be tempted to see this as start of a new long-term trend.
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