EXANTE Macro Insights

By Renée Friedman, PhD

The week in summary:

Welcome to Macro Insights #8. Over the past week we’ve seen US stock market indices fall as the reality that inflation may hit the economic recovery harder than expected and that the Fed may need to take more action sooner than expected is sinking in. Benchmark 10-year US treasury yields reached 1.65% on Wednesday before falling back to 1.59% later that day. They have increased from a low of 1.42% last week. There was at least one good bit of financial news for markets: on Tuesday, U.S. Treasury Secretary Janet Yellen extended the deadline for a potential U.S. government payment default to 15 December from 3 December, giving Congress more time to raise the federal debt ceiling after considering a massive social spending bill. 

In Europe the situation this past week was completely different from the US. Stock market indices continued to reach record highs this week following ECB President Christine Lagarde’s comments on Monday which made clear that tighter monetary policy was not on the cards. The STOXX 600 (up 22.79% ytd), CAC (up 26.68% ytd)  and DAX (up 18.46% ytd) all reached new highs on Wednesday.

In the UK payrolls rose by 160,000 in October, the unemployment rate fell more than expected to 4.3% in Q3 and vacancies increased to a record 1.172 million in 3 months to October. In short, the hurdle for the Bank of England to raise rates in December has largely been met as fears that the end of the furlough would cause disruption to the labour market were not justified. The GBP rose to its highest level against the Euro since February 2020 to 1.1920.

Things to look out for this coming week:

• In the Eurozone on Friday look out for Germany’s Producer Price Index for Europe’s largest economy as it will be a good indicator of the inflation trajectory. On Monday there is the Eurozone Consumer Confidence index. On Tuesday Germany’s GDP data will be released. On Tuesday we’ll see Eurozone Markit Composite PMI, Markit Services PMI and Markit Services data. On Wednesday we’ll have German IFO business climate, current assessment and expectation data; all good indicators of business sentiment for the next six months.  On Thursday look out for Germany’s GfK consumer confidence Index. 
• In the US on Monday look out for the Chicago Fed National Activity Index. On Tuesday we’ll see Markit Manufacturing, Services and Composite PMIs. In the US on Wednesday we will see Durable Goods data for October, jobless claims data, Non-defense capital good orders, Personal Consumption Price Index data, GDP annualised Q3 data, the Michigan consumer sentiment Index, New Home Sales data and finally, the FOMC meeting minutes will be released. 
• In the UK on Friday we will have GfK Consumer sentiment and critical retail sales data. On Tuesday look out for Markit Services PMI and Markit Manufacturing PMI. On Wednesday we’ll have the Autumn Forecast Statement which provides an updated economic outlook and previews the government's budget for the coming year, including expected spending and income levels, borrowing levels, and financial objectives. This will be critically important as the rate of inflation and the debt level (debt as a proportion of GDP) have put increasing pressure on the Treasury. Rising inflation is not just causing problems for the Bank of England and UK consumers; it is also making it more expensive to service inflation-linked government bonds.

Remember next Thursday (25 November) is US Thanksgiving. Markets will be closed for Thanksgiving and open for only half the day on Black Friday 26 November.

Regulatory roosters

It is clear that the pandemic sped up the adoption of digital technologies by corporations, governments and households. Those countries and companies with robust digital infrastructures, particularly digital financial infrastructures, were able to ensure payments were made to businesses and individuals. As noted by Oliva White from consultancy McKinsey & Company and Anu Madgavkar from McKinsey Global Institute in a 24 August 2021 article, this was possible due to well developed digital payment channels, along with high-assurance digital-identification systems that have broad population coverage and built-in consumer protection. But not every country or company was successful in implementing digital strategies quickly enough. The IMD World Digital Competitiveness Ranking, which measures the capacity and readiness of 64 economies to adopt and explore digital technologies as a key driver for economic transformation in business, government and wider society, shows that digital competitiveness does and will continue to shape global economic dominance and national welfare. 

What is also very clear from the pandemic is that technology stocks such as Apple, Microsoft, Sage Group Plc, Nordic Semiconductor, etc. have all benefited tremendously from this sudden surge in demand by companies, governments and households. And, as companies and countries look to boost their productivity and increase their competitiveness in a still very closely connected and globalised world, investors in these types of technology stocks will very likely continue to benefit. 

However, as much as investors have noticed the benefits associated with these stocks, governments and regulators are also noticing. It has often been said that “in  this world, nothing is certain except death and taxes.”  It seems regulation can also now be a thing of which one is certain. On Wednesday 17 November 2021, according to the Financial Times, the European Parliament's main political parties agreed to a deal that would apply to companies with a market capitalisation of at least €80 billion and offering at least one internet service, such as an online search. These requirements would be incorporated into the  EU's planned Digital Markets Act (DMA), which the EU plans to implement next year.

The proposed rules will also boost the power of national competition authorities to scrutinise tech companies’ acquisitions of smaller rivals. 

This comes on the heels of both the US and China increasing the pressure on the technology sector this year. But it isn’t just the big technology players that should be worried; individual countries' technology regulations are increasingly likely to come under scrutiny. Each country or region will be looking as to how regulators in each domain will require data to be shared within and across those domains. The US has already stated its concern about the risks the proposed EU DMA poses to US-based companies intellectual property and trade secrets. And that was after the US hit out at Chinese tech stocks earlier this year with the adoption by the SEC of the “Holding Foreign Companies accountable act” which requires companies identified by the SEC to be audited in the U.S. These companies will be required to submit certain documents to establish that they are not owned or controlled by a governmental entity in a foreign jurisdiction.

Amidst all these threats and potential changes, it can be very difficult for investors to think about whether their investment will continue to thrive as the global economic recovery strengthens, not just due to fears about rising inflation and its effect on company margins, but whether overzealous or, alternatively, too loose, regulation, will negatively affect their technology stock holdings. The simple fact is this: the barn door is already open for increasing regulation of certain technologies, the question is just how large and how even a landscape the barnyard will be.

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