Inflation, China’s economic slowdown and COVID-19: 3 key concerns for markets

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Head of AIS Portfolio & Business Consulting, Sophie Antal-Gilbert, discussed inflation concerns, recently passed U.S. legislation and the uptick in COVID-19 infections in Europe and the U.S.

U.S. October retail sales climb despite surging inflation

The week of Nov. 15 was fairly quiet in markets, Ristuben said, noting that the MSCI All Country World Index finished the week up just 11 basis points, as of noon Pacific time on Nov. 19. “That’s about as calm of a week as possible,” he remarked, explaining that the lack of any significant moves was likely due to a push-pull in markets between inflation concerns and reasonably strong economic data.

On the one hand, the ongoing rise in prices continues to be a concern for investors, Ristuben said, noting that U.S. inflation hit a 30-year high during October, with the eurozone and the UK also logging record-setting price increases. These numbers are substantially above the 2% target of most central banks, he stated, further fueling the debate over whether today’s inflation is transitory or not.

“At Russell Investments, our base-case scenario is still that inflation will subside over the next 12 months as supply-chain bottlenecks gradually resolve,” Ristuben stated, adding that a potential decrease in demand—which could be triggered by a slower rate of economic growth—may also help ease inflationary pressures.

On the other side of the ledger, he said that reasonably strong economic data in the here-and-now is helping offset market concerns over inflation a bit. As evidence, Ristuben pointed to U.S. retail sales for October, which topped consensus expectations by increasing at a 1.7% clip, versus 0.8% in September. Data from the nation’s manufacturing sector also came in hotter than anticipated, he observed, with both the New York Fed’s Empire State manufacturing survey and the Philadelphia Fed’s manufacturing index beating analyst expectations.

“Ultimately, this has led to a bit of a tug-of-war in markets between fairly robust economic numbers and ongoing inflationary concerns,” Ristuben remarked.

Potential impacts of the Build Back Better bill on the U.S. economy

Turning to the latest political headlines from Washington, D.C., Ristuben noted that U.S. President Joe Biden signed the bipartisan US$1.2 trillion infrastructure measure into law on Nov. 15. The passage of the bill is a positive for U.S. economic growth, he said, although he expects the overall impacts to be relatively modest in scope, as the spending will be spread out over a number of years.

In another significant development, on Nov. 19, the House of Representatives passed the roughly US$1.75 trillion social spending and climate bill, also known as the Build Back Better Act. The legislation now heads to the Senate, Ristuben explained, where lawmakers are expected to vote on it in December. “It’s very far from clear whether this measure will be approved by the Senate,” he said, noting that the reconciliation bill will need the vote of every Democratic senator to pass. So far, centrist Democrats Joe Manchin of  West Virginia and Kyrsten Sinema of Arizona have yet to say whether they will support it, Ristuben noted.

“If the Democrats can successfully get both of them on board, it’s also likely that the current structure of the bill—as approved by the House—will be changed by the Senate, meaning that the House would need to vote on a revised version later on,” he added.

As with the infrastructure package, Ristuben said it’s important to understand that the US$1.75 trillion in spending on healthcare, social and climate matters will take place over the course of the next 10 years. Putting the bill in further context, he noted that the size of it is dwarfed by the relief packages passed by Congress during the teeth of the COVID-19 crisis, “Overall, if approved, this bill would generally be a positive for U.S. economic activity—but the headline number is probably not what markets should be focusing on,” Ristuben stated.

COVID-19 infections tick up. Should markets be concerned?

Ristuben and Antal-Gilbert concluded the segment with a look at COVID-19 cases, which are on the rise again throughout parts of the U.S. and Europe. While infections are up in the U.S. by about 14% on a two-week basis, Ristuben noted that hospitalizations and deaths aren’t increasing at the same rates, due to vaccines. “At this point, I think it’s clear that the U.S. is unlikely to impose any major lockdowns in the weeks ahead,” he said, noting that there’s very little social or political appetite for new restrictions.

The situation is a bit different in Europe, Ristuben said, with some countries a little more willing to reinstitute restrictions, such as Austria, which recently announced that a nationwide lockdown will take effect Nov. 22. However, Ristuben expects that for most countries, the willingness to impose lockdowns will continue to wane.

Amid this backdrop, the coronavirus is probably third on the list of macroeconomic risks heading into 2022, he said, with inflationary concerns and China’s growth slowdown commanding the top two spots. “What we’ve seen with subsequent COVID-19 waves this year is that the economy hasn’t taken anywhere near the hit it took during the initial outbreak in the spring of 2020,” Ristuben stated. Even the highly contagious delta variant of the virus, while definitely a headwind to economic growth, wasn’t enough to turn the U.S. growth rate negative during the third quarter, he noted.

“Ultimately, for market purposes, unless something changes with the virus itself—such as the emergence of another variant—I believe that concerns over inflation and China will be the more pressing issues in the weeks ahead,” he concluded.

Editor’s note: Due to the U.S. Thanksgiving holiday, there will be no Market Week in Review on Friday, Nov. 26. We look forward to sharing our weekly insights with you again on Friday, Dec. 3.

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