highlights

Equities came under pressure last week after inflation concerns bubbled to the surface again. The Russell 2K led declines, however, all major U.S. indices finished lower.
CPI came in hotter than expected and registered at 6.2% y/y versus expectations of 5.9% y/y, its highest reading in more than 30 years.
The move lower snapped a big five-week winning streak and a four-week winning streak where gains were more than 1% in the S&P 500.
The House of Representatives passed the $1T infrastructure bill on Friday, helping the Industrial and Material spaces, both which outperformed on the week. The Build Back Better Bill (BBB) has not passed yet, and may be pushed back until next year due to inflation concerns.
Despite the risk off tone that underpinned U.S. markets for most of the week, U.S. equities attracted another $7.3B in inflows, bringing the YTD total to more than $340B.
Markets finished flat on 11/15 to start the week, reversing early session gains after commentary from former Fed officials was more hawkish, causing the 10-year yield to spike above 1.60%, having now climbed almost 20bps in the last five sessions.
Both Morgan Stanley and Goldman Sachs remain cautious on U.S. equities headed into 2022, with Morgan Stanley releasing their year-end 2022 Price Target, expecting the S&P 500 to finish at 4,400.
China posted a robust trade surplus of $84.54 billion in October, boosted by 27.1% surge in exports.
In Japan, the government plans to compile an economic stimulus package of over 40 trillion yen according to Nikkei.
Banco de Mexico raised the benchmark interest rate by a quarter point to 5%.

LAST WEEK

Major U.S. indexes ended lower on the week as the Dow Jones, S&P 500, NASDAQ, and Russell 2K all posted losses, ranging from 1.04% (Russell 2K) to 0.31% (S&P 500). Pressure on equities came after inflation concerns bubbled to the surface again with the release of the most recent consumer price index (CPI). Data showed CPI came in hotter than expected, and registered its highest level in more than 30 years. After the release, yields spiked across the curve, creating another overhang and bringing valuations into focus, more specifically the crowded growth names. Growth lagged value on the week, although Friday’s bounce provided some relief as growth underperformed its counterpart by .30%.

Ultimately, the move lower snapped a big five-week winning streak and a four-week winning streak of 1%+ gains in the S&P 500. This pullback was seen by many as a function of overbought conditions and the strength of the last four-to-five weeks in the equities market.

Sector Performance

From a sector standpoint, Materials and Industrials outperformed on infrastructure bill developments, while Healthcare outperformed with strength in select pharmaceutical names. Consumer Discretionary was the worst performing sector on the week with cruise lines, airlines and hotels coming under pressure. Tesla also weighed on the space; declining 15% on the week after Elon Musk sold more than $5B worth of stock. WTI and energy names fell and gold was up nearly 3.0%.

Inflation Headlines

Perhaps the most influential news of the week came on Wednesday morning when CPI was released. The print which came in at 6.2% y/y, the highest such number in over 30 years, surpassed expectations which called for an already high 5.9% gain y/y. Much of the focus turned to inflation continuing to run hot and supply chain issues which look to persist well into 2022.

The higher-than-expected CPI, in turn, drove fresh concerns of a Fed policy mistake and the potential for a misstep if one has not already occurred. Although some believe the Fed will now have to accelerate their plans to taper and raise rates, Central Bank members have continued to stress a wait and evaluate approach and will be looking for more information before taking any additional steps.

Overbought Conditions

As inflation was flagged as the primary reason for the move lower, many have also pointed to the general overbought conditions, potentially exacerbating the negative CPI news. Monday’s session marked the 65th record close of 2021, the second-highest total in history according to the Financial Times. Bespoke investment group reported Monday that all major ETFs in their trend Analyzer had entered “extreme overbought” territory, which is classified as more than two standard deviations above its 50-day moving average. Adding to the same theme, Bloomberg reported that approximately 84% of S&P 500 companies are trading below their 52-week highs and Morgan Stanley noted that leverage amongst both institutional and retail investors appears to be elevated.

House passes Infrastructure Bill

The House of Representatives was able to pass a $1 Trillion infrastructure bill on Friday, benefiting industrial and material-related names. The $1.75 Trillion Build Back Better (BBB) bill remained in flux, with little progress being made on several key factors of the bill including:

Provisions for paid leave
The SALT cap

With the passing of the infrastructure bill during the week and the already negative inflation news, several members in congress may be reconsidering voting in favor of an additional bill this year due to the potential for additional upside inflationary pressures. Joe Manchin specifically mentioned this to Axios but does not appear to be the only one in Washington who is reluctant to move forward with the BBB bill until the effects of the $1T infrastructure package are better understood and seen. The West Virginia senator has often stated he believes the social spending package would worsen inflation and leave the most basic government services like social security and Medicare in danger (West Virginia trails only Maine and New Hampshire with an aging population according to the Bureau of Economic Analysis data compiled by Bloomberg).

Flows

Despite the risk-off tone that underpinned U.S. markets for most of the week, global equities saw another $17.5B pile into the space, bringing the total for 2021 to more than $880M. U.S. equities on the week attracted another $7.3B, a seventh straight week of inflows to bring the total on the year to more than $340B.

This Week

U.S. equities bounced back and forth between gains and losses to start the week in what was a choppy session, before closing flat to down ever so slightly. The Dow Jones and NASDAQ fell 0.04%, while the S&P 500 finished even. The S&P initially reversed its gains from mid-morning, turning lower with tech companies coming under pressure and weighing on broader indices after yields spiked more than 5bps on the 10-year treasury, back over the widely watched 1.60% level.

The move higher in yields came after commentary from a growing number of market watchers chimed in. Ex-New York Fed President William Dudley said the Fed may have to raise rates to combat inflation, with the peak being “probably around 3% to 4%”, while, former Richmond President Jeffrey Lacker agreed, saying the 3.5%-4% range is plausible.

Both former Fed members, along with Larry Summers, suggested the Fed should accelerate tapering, which comes after the Central Bank announced less than two weeks ago plans to reduce their bond buying program by $15B/monthly. The commentary caused concern that the central bank would have to remove accommodative monetary policy sooner rather than later.

After a year dominated by strong gains in the equity markets and a selloff in bonds, strategists have begun making their market calls for 2022. As inflation looks to persist throughout next year, amongst other headwinds, including tightening policy, high valuations, and continued geo-political tensions, strategists from Morgan Stanley and Goldman Sachs expect a less impressive return for risk assets. Morgan Stanley sees the S&P 500 finishing 2022 at 4,400, a 6% decline from current levels, while Goldman has yet to release their exact year end target for 2022, they do believe the fastest growth is behind U.S. markets, making risky asset returns more muted than in recent memory. The tough potential backdrop outlines by the two firms comes even as profits are projected to grow to $209-$232 per share for the S&P 500, in comparison to the current $181.62 EPS.

This week’s focus should revolve around consumer strength, with Tuesday’s retail sales release expected to show an acceleration. Additionally, industry heavyweights Home Depot and Walmart are expected to report strong numbers, again outlining robust spending on merchandise and re- iterating the strong consumer and pressured global supply chain’s themes.

With the continued reporting of earnings, global dividends just logged their best ever third quarter, putting them on pace to exceed their pre-pandemic peak by the end of this year according to Janus Henderson. With balance sheets for corporations remaining strong, paired with an optimistic outlook, Janus raised their estimate for total payouts to $1.46T in 2021. Globally, more than 89% of companies either raised their payouts or held them steady, leading to the much faster rebound than originally projected.

Source: Janus Henderson Investors, Bloomberg as of 11.16.21

International

Last week, the Bloomberg World index rose 0.03% as earnings releases and management guidance painted a better picture of growth outlook. The JPMorgan Global Composite PMI climbed to 54.5 in October, up from 53.3 a month earlier. The surge is mostly attributed by a rebound in services as supply chain disruptions continue to weigh on manufacturing. The monetary policy divergence between emerging markets and developed markets was exacerbated by the latest policy decisions by Bank of England and Central Bank of Brazil. The effectiveness of monetary policy tightening to fight inflation remains to be seen, as exogenous factors are contributing price increases. Global inflation continues to rise with no imminent sign of slowing down.

Europe

In Italy, the government backed a bill designed to boost competition and eliminate bureaucracy in key sectors such as waste management, public transportation, energy, and telecoms. Prime Minister Mario Draghi said that the process of high-speed fiber optic infrastructure installation will be simplified. Italy committed to structural reforms to receive the 200 billion euros funds from the European Union recovery funds, which will be fully available in 2026. Italy is making progress on economic recovery as shown by its latest manufacturing PMI reading of 61.10, up from 59.70 a month earlier. However, the services industry remains under pressure as demand is rolling over following the summer peak. Italian stocks dropped 0.23% last week.

In the United Kingdom, Bank of England (BOE) surprised markets with its decision to leave interest rates unchanged despite signaling a probable rate hike in recent communications. BOE Governor Andrew Bailey said that this decision was a “very close call” as the revised Central Bank forecast sees inflation peaking in the Spring of 2022 before coming down around 5%. Andrew Bailey clarified the BOE decision in a Sky News interview and claimed that policy makers wanting to see additional hard evidence of how the ending of the furlough scheme affected the job market labor demand as well as wage demand. The FTSE 100 index gained 0.60% last week.

APAC

China posted a robust trade surplus of $84.54 billion in October, boosted by 27.1% surge in exports. Imports increased 20.6% during the same period according to data from China General Administration of Customs. International demand for Chinese goods partially offset the softer domestic demand amid a real estate downturn and reduced manufacturing output. The Caixin manufacturing PMI fell for the seventh consecutive month and closed at 49.2 in October, which is the lowest reading in two years. Limited power supply, material shortage and rising costs contributed to a decline in manufacturing output according to Caixin Global. The Shanghai Composite index gained 1.36% last week.

In Japan, the government plans to compile an economic stimulus package of over 40 trillion yen according to Nikkei. The plan should include 100,000 yen handouts to the 18 years and younger population as well as business tax incentives and subsidies for domestic travel. The recent GDP data release showcases a sharp economic contraction of 3% in the third quarter, partially explained by summer emergency restrictions and supply chain constraints. The sequential rise in government spending was not enough to offset the 14.4% decline in capital spending as well as the slowdown in private consumption. The NIKKEI 225 edged down 0.01% last week.

Emerging Markets

In Brazil, policy makers raised interest rates by 1.5% to 7.75% to mitigate inflation risks. This decision represents the largest interest rate tightening since 2002. Brazil analysts expect the benchmark Selic to rise above 10% in 2022 as they anticipate another rate hike in December and further hikes next year. From an economic standpoint, the manufacturing PMI fell to 51.7 in October from 54.40 a month earlier. Survey provider IHS Markit noted that new orders and production fell for the first time in six months amid notable slowdown in input buying growth. IHS Markit economist commented, “with companies unable to source key raw materials, production schedules were halted, and clients postponed purchases”. Brazilian stocks gained 1.44% last week.

In Mexico, the GDP declined 0.2% in the third quarter as tightening regulation regarding labor outsourcing and surging COVID-19 cases hit the services industry. A controversial law banned most subcontracting to ensure employers cover benefits and employees pay taxes. Manufacturing PMI rose from 48.6 in September to 49.3 in October as raw material shortages caused further drop in output and lengthened delivery times at near-record rate. Auto parts bonds were among the worst performing Mexican bonds amid the semiconductor shortage affecting the auto industry. In other news, Banco de Mexico raised the benchmark interest rate by a quarter point to 5%. Mexican stocks declined 1.05% last week.

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