Global supply chain struggles have persisted in 3Q, and look set to linger for at least several more quarters. Energy prices have surged in Europe, and transportation issues are creating petrol lines in the U.K. Data from China have shown notable disruptions, though fears of financial contagion came and went quickly last week.
“U.S. shipping operations remain clogged as ports, truckers and warehouses can’t find enough workers or agree on 24/7 operations … Tens of thousands of containers are stuck at the ports of Los Angeles and Long Beach, Calif., the two West Coast gateways that move more than a quarter of all American imports. More than 60 ships are lined up to dock, with waiting times stretching to three weeks.” (WSJ)
We’re left with the continuing stagflation scare. This should pass, as conditions generating price spikes ebb (eg, bottlenecks ease), but unfortunately, it’s still premature to say we are there yet. Inflation expectations remain high (U of Mich, NY Fed surveys). Businesses continue to report inflation concerns.
The Atlanta Fed’s tracking estimate for U.S. real GDP in 3Q is at 3.7% q/q Annual Rate. The Fed’s real GDP forecast for 2021 came down from 7% to 5.9% 4q/4q. Growth in 1H of 2021 has averaged 6.4%. So growth in 2H needs to average 5.4%+ to avoid another forecast downgrade.
Last week’s FOMC statement also strongly foreshadowed a QE taper, noting that “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” It was a unanimous vote. The Fed appears to believe there’s enough economic momentum in the U.S., and the November FOMC meeting is live. The QE taper should be finished by the middle of next year.
Based on recent history, the 10-year yield when the Fed first tightens gives some indication of where the central bank gets too “tight,” ie, how high rates might rise this cycle. As fed funds move above the 10-year yield at liftoff, that becomes quite “tight” and things break over time. It’s worth seeing how the U.S. bond market reacts to a taper in 2022 before making a call on rates hikes (once additional QE ends).
Bottom line: central bankers remain in a tricky spot, as we face choppy growth in 3Q with sticky inflation expectations. The 2021 plan (still) seems to be to taper QE soon (to help address inflation) while holding off on any rate hikes for an extended period (to aid growth). International developments do not appear to have changed this thinking much. In the meantime, all eyes are on supply chains for evidence of some clearing.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by FactSet.
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