21st October 2021 – US equities living with higher inflation and higher interest rates

Walid Salah Eldin

Active member
The US equities market is still possessed by Q3 robusting earning but this earning was on peak of inflation yearly rates, threatening the demand and alarming of close by tightening action to curb inflation and boost cost of borrowing by USD.

As what has been mentioned recently by the Fed’s vice president Richard Clarida who see that Fed’s reached more than its goals in the labor market and over inflation levels.

Federal Reserve Chair Jerome Powell in his most recent testify before the senate banking committee has shown that we are still having work to do to reach the maximum possible level in the labor market but we are in much more difficult situation right now as the inflation is growing by faster than expected pace and in need to be contained.

The FOMC members have highlighted last September their knowledge of much higher inflation pressure and lower growth rate to come next and they are looking more eager to handle the economic cycle from here, before watching shocking demand figures.

The committee members expected the economic growth to be this year at 5.9%, down from 7.0% in the June and their preferred gauge of inflation “Personal Consumption Prices” to be at 4.2% for 2021, up from 3.4% they expected in June raising also their forecast of Core PCE for the year to 3.7% from 3.0% lowering their, unemployment rate prediction to be at 4.8% at the end of this year from 4.5% they were foreseen in June.

The committee members meeting minutes of Sep. 21 and 22 have shown that the members’ discussions reached advanced point to taper Fed’s QE by $15b by the end of the year and that can be at the middle of November or December of the running $120b monthly scale which widened US balance sheet to reach $8.480tr on this Oct. 11.

Goldman Sachs lowered also its forecast for this year economic growth to 5.6% from 5.7% it was expecting previously and for 2022 it is expecting now 4% annual growth rate from 4.4% it was seen previously and amid the current supply chains shortages which affects negatively on the global growth many companies are expecting now lower earning for fourth quarter, as producing new products at the current prices raised the worries about the demand for them.

We have seen also at the beginning of the week the Chinese annual growth rate release of Q3 coming at 4.9% well below the median forecast which was referring to 5.2% expansion following growth by 7.9% in the second quarter.

The Chinese industrial production at this level of prices and lake of supplies rose by only 3.1% yearly in September, while the market was waiting for increasing by 4.5%, after rising by 5.3% in August.

But the demand for consuming was still running well above as the retails sales rose by 4.4% in September, while the consensus was pointing to rising by only 3.3%, after increasing by 2.5% in August, showing that the demand is still leading at the current prices and no divergence to the downside yet.

We have seen also by the end of last week Sep US retails sales rising by 0.7%m/m, while the consensus was referring to declining by 0.2%, following increasing in August by 0.9%. The release could calm down the markets which were worried about the consuming spending at these levels of prices, as this spending forms 70% of US growth rate.

In response to the crisis, the Fed has managed in March of last year to widen its balance sheet initially by USD2.3tr, before driving it to surpass in May USD7tr level reaching the current unprecedented levels above USD8tr to the support the small businesses and weigh down on the cost of borrowing for supporting the economy and for the US government which is always in need for lower UST yields to pay to have lighter financial burden it carries in the current prolonged debt passage which is need to be lifted again by next Nov. 3.

The US treasuries has got debt ceiling boost permission to borrow $480b more and they are expected to run out, before that date and it has previously passed CARES Act USD2tr driving the annual deficit for FY2020 to unprecedented level reaching $3.1tr with nearly USD20.9tr GDP hurting the creditability of US which is looking to struggle harder to have faster growth rates ahead amid the current prices.

While The markets are still looking forward for another substantial relief package spending for infrastructure, health care and education.

The US economy has already got boosts by several reflation plans also during Trump's era which watched also threats to the global economy because of his trade wars which drove the Fed to lower the Fed fund rate three times by 0.25% in the period from Jul. 31 to Oct. 31, 2019.

The Fed is now criticized by fueling assets bubble and contributing in using of higher rates of leverage in the equities market during The Fed’s Chief Gerome Powell’s era which should not be extended as many Senators ask for now.

But Powell does not deny this fueling and he always refers to that the Fed is only one element among others like the fiscal stimulating policies and the supply chains weak stance, following propping the economy up from the bottleneck.

While this artificial inflation fueling is one of the main reasons why we see the US equities indexes at these levels reflecting higher assets values more than reflecting the companies’ activities profitability.

Now, the Fed is looking willing ahead to curb that bubble letting the yield curves rising, while we are ahead of facing higher yearly inflation in the winter fueled by high energy prices.

But anyway, the situation is now completely different thanks to the central banks easing efforts and the governments reflation plans and the current existence of vaccine against Covid-19 and Fed’s tightening action next became fully priced in the markets right now and it is just the pace act of doing to be figure out next by God’s will.

Kind Regards

Global Market Strategist of FX-Recommends

Walid Salah El Din


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