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Businesses continue to flag up supply chain issues

Key takeaways

Despite a lower-than-expected inflation reading in the UK, speculation is rife that the Bank of England could soon raise interest rates. Meanwhile, large businesses continued to point to supply chain issues and rising input costs.

  • UK inflation data released last week (the Consumer Price Index reading for September) appeared to indicate a slight dip in pricing pressures. However, this is likely to represent only a temporary respite, with ‘year-on-year’ data affected by higher activity in the same period last year, when Chancellor Sunak’s ‘Eat Out to Help Out’ scheme pushed up demand at restaurants and other eateries. There is growing consensus that inflation is set to be in the region of 4% by the end of the year, and is unlikely to drop back until the latter part of 2022.
  • With this in mind, all eyes are on the Bank of England’s policy meeting in early November, when interest rates could be raised. Financial markets are poised for this possibility, with a potential rate hike already beginning to be reflected in asset pricing.
  • In an otherwise relatively quiet week for economic news, an early look at survey data covering the manufacturing and service sectors in October (the Purchasing Managers’ Index, or PMI) was released. While not official data, PMI readings can point to important trends in manufacturing and services, and can do so ahead of time. In the UK, higher readings for the service sector (the strongest in three months) have been interpreted by some as indicative of a potential resurgence in economic recovery, providing further encouragement to the idea that central bank interest rates could soon be raised.
  • It should come as little surprise to discover that the PMI survey data also highlighted ongoing staff and materials shortages for businesses in the manufacturing sector. Indeed, supply chain issues represent a running theme for business updates at present. Regular readers will know that we are in the early stages of the corporate ‘earnings season’ covering the third quarter of 2021, with large corporations reporting the latest results and offering outlooks for their businesses. While reports have so far been broadly positive, virtually all reports have cited ongoing supply chain issues, often pointing to the need to raise prices to cover spiking input costs. So far, it has been an upbeat earnings season, despite these concerns, but financial markets will be watching closely.

Weekly market moves

  • Most major stock markets enjoyed a positive week in sterling terms, though Japan continued to lag. The UK market fell slightly.

  • Bond prices were slightly lower over the week; bond yields, which move inversely to prices, strengthened. However, the prices of inflation-linked government bonds (the standout performers for the year so far) strengthened once more.

  • In a buoyant week for commodities, the prices of precious metals and oil rose.

What to look out for this week

  • ‘Earnings season’ comes into full flow this week, with a number of tech/ecommerce giants (Facebook, Microsoft, Apple, Amazon, and Google’s holding company Alphabet) due to report on their results for the third quarter of the year.

  • On Wednesday, the next UK Budget will be announced, alongside the results of a Spending Review detailing how the government will fund public services over the coming three years.

  • Towards the end of the week, the latest policymaker decisions will be announced at the European Central Bank and the Bank of Japan, and economic growth data for the US and Europe over the third quarter 2021 will be released.

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