MACRO
Growth: The pandemic recovery remains incomplete and uneven. Global GDP stands 2% below its pre-crisis path with services sector and Emerging Markets economies underperforming Developed Markets, which are led by the US, China and Japan. Europe is the big laggard as new infections complicate the reopening. U.S. growth was driven by strong consumer spending, up 1.3% in October. Households continue to spend using accumulated savings, credit card debt and rising personal incomes. This in spite of falling consumer confidence, which is declining because of high inflation.
Inflation: Supply shocks are pushing global inflation towards a 5% gain this year and are now constraining output and demand, although pressures are abating. At this point it is not clear whether the current Covid wave and the appearance of the Omicron variant will be inflationary or deflationary. The drop for energy prices will initially be deflationary (energy prices contributed a third of inflation in October). However, with China intent on maintaining its draconian zero-Covid policy, the Omicron variant could add to inflationary pressures by exacerbating existing supply chain problems.
Policy: Despite rising inflation, global central bank and fiscal policies remain accommodative, as there is reluctance to act too soon. Real interest rate is negative, including for US TIPS.
MARKET
The reflation trade, boosted by high consumer spending, inflation and rising interest rates came to an abrupt halt towards the end of the month driven by mounting infections in Germany and other Central European nations and the appearance of the Omicron variant (more contagious than Delta). The Fed ́s Powell statements on the last day of the month on “temporary inflation”, “strong economy” and “acceleration of the tapering process” spooked markets at a time of high uncertainty and fueled a renewed sell off in risk assets, flattening of the yield curve and flight to quality.
November saw negative total returns across major equity regions, with EM being the worst performer (-4.1%). US equities delivered negative returns at -0.7%. DM government rates was the only asset class that saw positive returns (USTs and Bunds 10Y total return at +1.1% and +2.2%, respectively). Credit spreads widened (US HY and EUR HY at +50bp and +51bp, respectively). Tech was the only global equity sector that delivered positive returns (+2.5%). In G10 FX, only JPY appreciated against USD (+0.7%). Oil dropped 20%.
After the news on the new Covid variant, confidence indicators have deteriorated. Volatility has spiked, with VIX reaching 27.2%. The Fed meeting minutes showed an increasing concern that the unwanted price pressures could last for a longer time and readiness to move to reduce its bond purchases more quickly — or even start raising the Fed’s benchmark interest rate sooner — to make sure inflation does not get out of hand. On the 30th, Fed Chair Powell announced changes in language and acceleration in the tapering process.
PORTFOLIO
No significant changes were undertaken during the month.
OUTLOOK
We expect the global economy to further grow into 2022 as supply chain and contagion drags fade, supported by increased vaccination and normalizing household savings rates. Near-term, growth should rotate toward Asia and the US and away from Europe. On markets, it is likely Omicron generates a short impact on equities like Delta did in July – not like the more prolonged drop in March 2020 when the pandemic broke out. We remain positive on and maintain our position in Developed Markets equities, focus on US and big tech. In credit, we continue to favor US high yield.