EXANTE Macro Insights

EXANTE Macro Insights

By Renée Friedman, PhD

The week in summary:

Over the past week markets continued to confound. In the curious case of why markets aren’t having a textbook reaction to slowing growth and higher inflation, the S&P and Nasdaq reached new highs on Wednesday. The only explanation can be a series of above expected corporate earnings and that supply-chain disruptions and labour and raw material shortages will be resolved by early 2022 as (or rather, if) Covid and its variants recede with increased vaccinations and no new variants emerging. The bond markets, on the other hand, are showing a bit of nervousness about the stickiness, as represented by rising wages, and the consistently above target rate of inflation, with the possibility of central banks suddenly playing catch up if current supply and demand mismatches cannot be resolved as suggested by Central bank bosses by the mid to later half of 2022. Bond yields were slightly up following the Fed’s announcement on Wednesday. In that announcement, which took virtually no one by surprise, the US Fed decided to start their taper: they will begin winding down the monthly asset purchases later this month at a pace of $15 billion per month. The FOMC decided to maintain the target range for its benchmark policy rate at zero to 0.25%. The decision was unanimous.The Fed will keep the same pace on winding down for November and December but said «the committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook,» This may be coded language for "if inflation remains well above target for longer than expected, we will increase the pace of winding down and start thinking about a rate hike sooner."In a gentle pushback to market expectations, US Fed Chairman Powell was quick to say that he wouldn’t expect any changes until Q2/Q3 next year but that the Fed will continue to monitor the situation and use whatever its sees fit in its toolbox to maintain price stability. He claimed a rate rise is off the cards until the labour market reaches maximum potential and labour participation rates also increase. The thing is, no one can actually agree what the maximum labour market (full employment) is (ditto for participation rates).

Although ECB President Christine Lagarde reiterated on Wednesday that the ECB will not be raising rates in 2022, there appears that there may be some dissension brewing, Bostjan Vasle, an ECB governing council member and governor of the Bank of Slovenia, said on Wednesday that the likelihood that elevated inflation will become entrenched is increasing and that he can’t exclude a shift in expectations and second-round effects on the labor market. In short, a rate rise cannot be ruled out for 2022 if this happens.

The surprising stock jump of the week was Avis Budget Group Inc. The stock price surged on Tuesday after the rental-car company reported quarterly earnings of $10.74 per share, well above consensus expectations of $6.52. CEO Joe Ferraro told analysts Avis planned to play a big role in the adoption of electric cars in the U.S. The U.S.stock rose to a record $545.11 but fell almost as rapidly as it had suddenly risen, indicating plenty of investor profit taking. The rapid jump in the stock price triggered at least 10 trading halts for volatility as 12 million shares changed hands. Although Avis was mentioned on Reddit’s WallStreetBets thread and chatroom Stocktwits, these don’t appear to have been the cause of the rapid rise (and fall). Perhaps investors, excited by the promises of the Glasgow Breakthrough Agenda, a plan to coordinate the introduction of clean technologies, including clean electricity and electric vehicles in order to rapidly drive down their cost, agreed at the Cop26 summit by world leaders on Tuesday, got a bit over excited about the possibilities then realised that it will actually take years to come to fruition so better to cut and run now?

Things to look out for this coming week:

  • In Europe on Friday we’ll have Eurozone retail sales, indicating consumer spending and sentiment. On Monday the Eurogroup will meet to discuss overall macro developments, including inflation, in the Eurozone area as well as the objectives and uses for a digital Euro. On Tuesday the Ecofin meeting will discuss financing of Next Generation EU, a temporary recovery package to help boost EU economies in the wake of COVID-19, and the implementation of the Recovery and Resilience Facility, the centrepiece of Next Generation EU that supports reforms and investments in EU member states through loans and grants. On Thursday the ECB’s European economic bulletin will be out, providing a look at ECB inflationary expectations.
  • In the US on Friday there are non-farm payrolls, average hourly rate, the labour force participation rate, and the unemployment rate. The Fed chair Jerome Powell made clear in his speech following Thursday’s announced taper, that the Fed will be closely monitoring wages, unemployment rates and labour participation rates as employment and labour force participation being at maximum rates are conditions for a rate rise after 2Q and/or 3Q 2022 (the timeframe for the taper finishing). On Tuesday data on Producer prices will be released. On Wednesday there will be data on the consumer price index including CPI ex-food and energy (m/o/m, y/o/y) as well as initial and continuing jobless claims.
  • It will be a relatively quiet data week in the UK with data on Thursday for industrial production, total business investment (an indicator of overall growth and demand), manufacturing production, industrial production, and GDP (m/o/m, q/o/q and y/o/y)

And don’t forget daylight savings ends this coming Sunday in the US and Thursday is Veterans day in the US meaning bond markets will be closed that day.

ESG’s cyber dimension

As made clear this past week during the COP26 conference, climate change is the biggest risk to the planet. Changing weather patterns due to rising carbon dioxide and methane levels in the atmosphere are, as scientific evidence increasingly shows, affecting global weather patterns causing an increasing number of extreme weather events, e.g. floods, draughts, wildfires, hurricanes and tornadoes, and negatively affecting the natural world and the biodiversity within it that is critical for our own survival. Such weather events are impacting global food production, human health, and ushering waves of migration from the poorest emerging markets to the developed countries. However, although the physical and transition risks of climate change are the biggest ESG threats to business, peoples and governments, another ESG risk is also gaining prominence; cyber risk.

Long viewed as a credit risk because of the potentially negative disruption of critical business processes, data disclosures and reputational effects on investor confidence, cyber risk is now being more broadly. The concerns related to cyber risk previously focused more on business data, particularly customer information, being hacked and sold, the stakes have changed and risen. The growth in ransomware attacks,e.g., the shut down of the Colonial pipeline in the US earlier this year, demonstrates that the ability to target any geography or sector can have serious consequences for businesses. And it is not just business at risk. As noted by S&P in a 25 October article, as governments digitise, a process that has been accelerated due to the pandemic as many employees needed to work remotely, third-party digital infrastructure are increasingly used to expand the digital ecosystem and integrate new digital infrastructure. The growing dependency on third-party providers increases risks to everyone: businesses, governments and individuals. For example, according to the Identity Theft Research Center (IDRC), in the US alone, the number of data breaches publicly reported by the end of 3Q 2021 has exceeded the total number of events in full-year 2020 by 17% — 1291 breaches in 2021 compared to 1108 breaches in 2020.

So what makes it an ESG risk? For many it has to do with the «G» or governance factor: it is the responsibility of a company or government’s management to ensure that operational risks are managed appropriately, that adequate control frameworks are in place to address threats to information security and business continuity. However, some companies and investors, like JP Morgan, are now viewing it as an «S» or social factor risk. In a 19 August blog the organisation noted «[Cybersecurity] is becoming a major topic for company management, global investors and players from all industries... a far broader demographic is becoming increasingly concerned with cybersecurity’s social impact as well as technological implications.» In short, the social impact now includes how cyber attacks can destabilise global supply chains across geographies, how they can disrupt government services, and how these combined actions can negatively affect the day to day lives of people across the globe.

So as governments and investors agree to increase their ESG reporting to tackle climate change, and as new agreements on measuring these risks, such as the formation of a new International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs, come into play, businesses and investors should expect new proposals for voluntary or even regulatory frameworks for detecting and reporting cyber security risks.

DISCLAIMER: While every effort has been made to verify the accuracy of this information, EXT Ltd. (hereafter known as «EXANTE») cannot accept any responsibility or liability for reliance by any person on this publication or any of the information, opinions, or conclusions contained in this publication. The findings and views expressed in this publication do not necessarily reflect the views of EXANTE. Any action taken upon the information contained in this publication is strictly at your own risk. EXANTE will not be liable for any loss or damage in connection with this publication.

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