Market Pulse | Goodbody Wealth Management

• Inflation was centre stage last week with the core figure in the US just missing the 5% level. For once it was not higher than expected, and that was a bit of a relief. The other positive that was taken from it was the decline in the month-on-month rate i.e. we are passing the peak. • The Fed meets this week and the expectations are that it will announce accelerated tapering, with net buying to be completed by March next year, and that the ‘dot plot’ will be brought forward by a couple of quarters. Expectations have moved to a relatively aggressive statement from the Fed. Post the ‘Powell pivot’ of the week before last some of the investment banks have revised their interest rate forecasts. • As we approach year end the background remains equity friendly. Earnings are still being revised upwards. These have been acting as the perfect inflation hedge -as inflation has been accelerating in the second half of this year so has earnings growth. The Q4 reporting season will be kicking off in 4 weeks and the signs are that it will be another very strong quarter. In China the authorities are beginning to implement policy changes instead of just talking about them.

• The Powell pivot became the major talking point last week. During his testimony to Congress he said that the Fed does need to talk about a faster rate of tapering. He also pushed inflation concerns up the agenda. No doubt part of this was in response to the White House putting tackling inflation as a priority. As a result, there was a meaningful increase in interest rate expectations over the week. • The encouraging thing from last week was the reaction of the fixed income markets. Our fear has always been that as we moved towards normalising monetary policy, there could be a lot of volatility in the bond market which would undermine all asset classes (an interest rate scare). That did not happen last week. Yes, there is a bit of pain in the short end but longer dated yields fell and that is what is important to other asset classes. • Of course, Omicron is in the background and there is risk that its spread causes dislocation in the global economy. Perhaps this is what the bond market is thinking. One problem with this thinking is that if the dislocation does become significant then monetary tightening probably goes off the agenda. The Delta variant did cause some turbulence in the global economy and in equity markets but the growth rate remained high and the impact was short lived. Using that as the ‘playbook’ it says stick with your long-term strategy and that is what we will be doing and looking at last week’s reaction in the fixed income makes us a little bit more comfortable about that.

• Covid and the new variant will be the main focus in the short term. The reopening theme was already under pressure as infections were rising rapidly in Europe and this gained further momentum on Friday with some very extreme moves in prices. • This should not impact too much to views on asset positioning. Policy makers will remain very supportive, which is important, and the experience with the Delta variant has been quite benign. Friday was a shortened trading day in the US but the equity market it saw the second largest daily inflow this year from retail investors. • The equity mix is the more pertinent question and the hit to the reopening trade is a painful journey. But it seems like a lot of bad news has been priced in now so without some firmer information it would be difficult to add value reacting to the developments. • Last week we were still getting good indications on economic performance. The US is still leading. High frequency indicators (restaurant bookings, passenger traffic, credit card sales etc) were all back to new highs for this year. In fact, it looks like we are back into an upgrade cycle for the US economy although that should not last too long. There were also indications that China would start more efforts to support the economy Premier Li called on the provinces to step up infrastructure spending and the PBoC said it would be doing more to stabilise the credit market. The global economy looked set to have a quite strong finish. This was feeding into earnings as well. We are still getting upgrades, even in the euro area where the outlook has become most clouded. Earnings growth for 2021 was pushed up 1% over the last week. The environment remained very equity friendly.

• Covid became the story that the market was once again following closely last week, with a rise in infections in Europe. Reopening stories were under pressure and the return to normality for these companies looks likely to be impacted. The markets also saw the shift to quality within equity markets, which is due to how companies are managing the cost and supply pressures which they face. • Many Investment Banks are producing their outlooks for 2022, including Bank of America where it has turned aggressive on the timing of interest rate rises, with an interesting feature of it forecasts being the pace and the peak. It is expecting a 0.25% increase in Fed Funds per quarter and the peak to be between 2.0% and 2.25%, which can result in a benign interest rate cycle. There is not much expectations for downside left in fixed income markets and little disturbance for equity markets. • It was a better week for data with very encouraging figures from the US. Strong figures within retail and industrial production, as it could indicate that we are passing the worst in the impact of supply chain rigidities. It was a flat week for index levels, and this was the US statistics that came in strongly and will offset any turbulence in the EU area which will push us on into 2022.

• Economic data last week was dominated by the CPI release in the US showing continued inflationary pressure in the US economy. Market reaction was relatively muted. A lot of this relatively calm reaction is probably due to the Fed saying it will not be making any judgement about how permanent the inflation pressures are until the middle of next year. • We think that we will see a peaking in the year on year growth rate in the global economy as the reopening impulse fades in Europe and the US plateaus from its Delta variant rebound. As we travel into 2022 economic growth will remain elevated but at a slower pace than we are experiencing now. Thus, we feel it appropriate to move some more of our equity exposure to mid-cycle type names.