Financial Bulletin – November’21


Inflationary pressure became an ever larger consideration for investors during October as the US and UK Central Banks openly talked about their concern that inflation expectations were becoming elevated.

The UK Office for Budget Responsibility forecast that inflation could reach 5% next year, bringing with it the possibility of the highest inflation rate since the early-90’s.

Meanwhile the US Central Bank head, Jerome Powell, struck a ‘hawkish’ tone after inflation expectations breached 3% for the first time in decades.

Despite costs continuing to rise at a significant pace the latest surveys suggested that the US and UK economies accelerated during October after a slowdown lasting several months.

In contrast growth in the Eurozone continued to weaken.  

Most stock markets bounced back in October after retreating during September.

Over the last 6 months the FTSE 100 returned 5.76%, the S&P 500 returned 10.38%, whilst the Euro Stoxx 50 returned 7.43%.

The Japanese Nikkei 225 returned 0.28% over the same period.

The broad emerging markets index returned -3.25% in US$ terms.

The 10 year US Treasury yield continued to rise during October as financial markets continued to price in future interest rate rises.

US Economic News

During October US inflation expectations for the next 5 years briefly touched 3% for the first time since at least 2002.

This effectively means that investors believe inflation will remain above the Federal Reserve’s target for the next 5 years.

Clearly the market is not yet convinced by the Fed’s insistence that inflation will fall swiftly after next year.

This prompted Jerome Powell to remark that the risk of higher and longer inflation is growing and that the Central Bank stands ready to act– following this announcement inflation expectations fell again.

Whilst supply chain problems are causing inflationary pressure to increase, they are also causing the pace of growth to falter.

Growth in the third quarter of the year was estimated at just 2% (annualised) which is significantly less than the 2.7% predicted. This emphasises how the economy is now operating below potential due to supply shortages.

On the other hand there were some positive signs during the month as a strengthening services sector may be driving a re-acceleration in growth.

The services sector improved at the fastest rate in three months as demand

increased significantly and companies took on new workers at a solid rate.

In contrast the manufacturing sector is experiencing the most extensive supply and labour shortages on record.    

UK Economic News

The latest surveys painted the now familiar picture of supply chain issues – the services sector reporting the worst cost inflation for at least 25 years and the manufacturing sector in a similar position.

The Office for Budget Responsibility’s latest economic outlook forecast that inflation may peak above 5% next year.

If this occurs, then prices may be rising at the fastest rate since the early-90s.

At the same time the Governor of the Bank of England dropped a not-so-subtle hint about raising interest rates.

Andrew Bailey claimed that the Central Bank “would have to act” in response to rising inflation expectations.

Away from the inflation outlook, however, the economy improved slightly during the month.

The services sector accelerated on the back of robust demand and jobs were created at a healthy rate.

The headline rate of unemployment fell to 4.5%, which is the lowest rate for a year and is now only slightly above the pre-pandemic level.

Still, companies continued to report that they were struggling to recruit workers and having to offer higher wages to hold on to existing workers.

Wage growth will be a key factor in determining how long inflationary pressure lasts for.

Average wage growth remained high at 7.2% in the year to August, although this marked the second month in a row that the rate of growth had slowed down.

Eurozone Economic News

In contrast to the experience in the US and UK the Eurozone economy deteriorated at the same time as price pressures are rising.

Whilst the services sector improved at a slower rate, it was the manufacturing sector which really dragged the region down. In fact, growth in manufacturing production contracted at the fastest rate since the initial lockdown in 2020.

On a more positive note, the headline unemployment rate fell for the fifth month in a row in September whilst business surveys suggested that jobs were created at one of the fastest rates in two decades.

Inflation continued to climb and reached 4.1% in October – the first time that the 4% level has been breached since 2008.

Nevertheless, the ECB chief Christine Lagarde continued to maintain that interest rates are unlikely to rise during 2022.

Wider Economic News

The Chinese economy was not immune to rising inflationary pressures during October and, on top of that, suffered some widespread power shortages.

Despite these headwinds both the manufacturing and services sectors improved during the month.

Both sectors improved at the strongest rates since the summer.

Similarly, the Japanese economy also exhibited some positive momentum during the month – the services sector expanded for the first time in almost two years.

Financial Markets and Corporate News

Most stock markets bounced back during October after a poor September. However, there remains anxiety amongst investors around inflation and Central Bank policy.

Over the last 6 months the FTSE 100 returned 5.76%, the S&P 500 returned 10.38%, whilst the Euro Stoxx 50 returned 7.43%.

The Japanese Nikkei 225 returned 0.28%.

The broad emerging markets index returned -3.25% in US$ terms.

The 10 year Treasury yield continued to rise during the month on the back of rising expectations of interest rate increases.

The Investment Association (IA) UK Gilts sector returned 1.56% over 6 months, whilst the IA Sterling Corporate Bond sector returned 0.62% and the IA Sterling High Yield sector returned 1.42%.

 Summary of Key News:

  • Inflationary pressure continued to build around the world.
  • Both the UK and US Central Banks hinted at action to reduce inflation.
  • UK wage growth remained at an historically high level.
  • The Eurozone economy weakened, and the inflation rate breached 4%.
  • Both the Chinese and Japanese economies regained some momentum.

Financial Markets:

  • Over 6 months the FTSE 100 returned 5.76%, the Euro Stoxx 50 returned 7.43%, and the S&P 500 returned 10.38% (total return).
  • The Japanese Nikkei 225 returned around 0.28% (total return).
  • The broad emerging markets index returned approximately -3.25% (in US$ terms).
  • The   IA UK Gilts    sector    returned 1.56% over 6 months, whilst the IA Sterling Corporate Bond sector returned 0.62%, and the IA Sterling High Yield sector returned 1.42%.


The issue of rising inflationary pressures has been flagged for some time, but these difficulties are becoming more acute.

The key question for investors remains whether these supply chain issues are temporary, beyond which the global economy can continue to recover, or whether inflation becomes a problem for an extended period.

The fact that inflation expectations rose significantly during the month suggests investment markets have now come round to the view that this is more than a temporary blip.

As a result, both the US and UK Central Banks are now openly talking about action to keep expectations in check.

This opens the door to a situation where any comment by a policymaker, or a policy misstep, could move markets quite significantly.

Central Banks must walk a tight line between ensuring that inflationary expectations do not get out of hand and not choking off recovery.

More broadly, the extremely low interest rate environment has meant that relatively high stock market valuations can be supported.

If Central Banks are judged to have ‘jumped the gun’ in terms of raising interest rates, then this could mean that stock market valuations are no longer justified.