Inflation coming? Whilst regular readers may spot a familiar thread, which I have pulled at on various occasions, we are starting to see signs of inflation coming through. Yields have started to shoot higher along with US 10-year breakeven inflation expectations, with the latter rising to 1.84 per cent, the highest since May 2019 amid signs Washington could yet move on a stimulus package. Five-year average inflation expectations are at 2.25 per cent. Benchmark 10-year US yields climbed to 0.95 per cent, approaching the November peak again. Gold rallied on higher break-evens and lower real yields, now up to $1,840 on the old 38.2 per cent retracement support of the Mar-Aug rally and approaching the key $1,850 support-turned-resistance.
Democrat leaders Nancy Pelosi and Chuck Schumer got behind a $908bn bipartisan deal and said they would use this as a basis for a relief bill. It puts more pressure on the GOP to agree to a relief bill before Christmas. Given the CDC is warning of the “most difficult time” in US public health history over the winter, financial relief will be vital until vaccines are rolled out.
More stimulus heaped on what’s already been delivered combined with a mass reopening of economies next year will deliver a pro-cyclical high that will create inflation. As discussed on multiple occasions, whilst there are barriers, the conditions for inflation are there: pent-up demand, a savings glut, the vast increase in the money supply and enormous liquidity put that is underpinning global financial markets, as well as central banks openly saying they will let economies run hot: the Fed’s average inflation targeting explicitly calls for an overshoot, which may allow inflation expectations to become unanchored. Central banks are not positioned or possessing the necessary fibre to deliver an increase in interest rates at a level required to suck the money back out of the system in the recovery phase. The recent US PMI surveys for November showed the quickest rise in selling prices yet recorded, with the rate of inflation hitting a record high in the service sector and a 25-month high in manufacturing. Whilst inflation was the dog that didn’t bark after the great financial crisis, it may be about to bite. Post-GFC growth in money supply was absorbed by banks to bolster liquidity and capital requirements. And there was no coordinated fiscal stimulus alongside the monetary policy support. This time the growth in M2 money is being mainlined into the economy’s veins.
Britain’s decision to roll out the Pfizer/BioNTech vaccine in the coming days is being treated as a positive and supportive of the reopening/rotation trade that was the major market theme of November. This saw the FTSE 100 rise over 1 per cent yesterday and the index now looks reasonably well supported above 6,400. As discussed yesterday, UK equities are fast becoming a consensus buy with cyclical weighting and relative cheapness to peers making them look more attractive as the economy bounces back next year thanks to vaccines. European markets were lower in early trade on Thursday with the FTSE outperforming remaining broadly flat. US futures were a tad lower after the S&P 500 rallied 0.2 per cent to another record high in a mixed session on Wall Street on Wednesday that started off in drab fashion before the lower-dollar, higher-yield risk-on trend took hold and bulls drove the index to close at the high of the day at 3,669.
UK Company Announcements
| AJ Bell (AJB) | Record customer growth, improved customer retention and a 27 per cent rise in net assets in the year to September provide the backdrop to the investment platform's decision to increase the full-year dividend by 28 per cent to 6.16p per share. |
| Paragon Banking (PAG) | Today, the buy-to-let mortgage specialist becomes the first UK-focused FTSE 250 lender to announce a dividend since the pandemic began. Citing stronger capital buffers and a stable loan book, chief executive Nigel Terrington told us "it's difficult to see why we wouldn't" announce the 14.4p per share distribution. |
| Impax Asset Management (IPX) | Shares in the sustainability-focused asset manager touched a fresh high of 617p this morning, after full-year results flagged £1.9bn of net inflows since the end of September. |
| Phoenix Group (PHNX) | The savings and retirement business expects to generate £1.7bn in cash this year, exceeding its £1.5-£1.6bn target range. The group's balance credit portfolio has also held up well, and is now being re-oriented to toward a net-zero carbon emission footprint by 2050. |
| Sainsbury J (SBRY) | In a boost to the public coffers - if not shareholders in the supermarket - management has decided to 'forgo' £440m in business rates relief. The move follows growing political pressure, as well as Tesco's decision to repay the £585m economic benefit. |
| Oxford Metrics (OMG) | Adjusted pre-tax profits dropped by more than half to £2.6m in 2020, which the virtual reality company attributed to sales delays in its largest division, Vicon. |
| CareTech (CTH) | The group largely shrugged off Covid-19, with like-for-like underlying cash profits climbing by 14 per cent in the year to 30 September to £84m. Net debt has ticked down by 8 per cent to £270m and the final dividend has increased by a tenth to 8.75p per share. |
| Clipper Logistics (CLG) | Operating profit increased by more than a fifth year-on-year in the six months to 31 October to £20m, on the back of strong growth in e-fulfilment and returns management. With many of its sites experiencing record volumes over the Black Friday weekend, the group believes that full year earnings will come in ahead of its current expectations. |
| Touchstone Exploration (TXP) | Another well success in Trinidad and Tobago has seen the gas explorer climb 15 per cent in early trading. Touchstone boss Paul Baay described the Cascadura Deep-1 as the “best well we have drilled” on the Ortoire block. This is the fourth successful well the company has drilled this year. |
| Countryside Properties (CSP) | Following the multi-pronged public attack on the housebuilder from shareholder Browning West, the board has appointed appointed Rothschild & Co to review the separation of the housebuilding division from its partnership operations. Non-executive chairman David Howell has also announced his intention to step-down from the board next year. |
| MJ Gleeson (GLE) | Management expects results for the full-year to be ahead of expectations, following strong demand from the housebuilding business and a pick-up of activity in strategic land deals. It also expects to resinstate the dividend next year. |
Yesterday afternoon saw a sharp and sustained move lower in the dollar, boosting major peers like the euro and sterling. EURUSD advanced beyond 1.21 with little resistance in the way to 1.25. GBPUSD trades towards the top of the recent range at 1.34. Uncertainty over whether Britain will secure a free trade deal with the EU is preventing a breakout. Upside pressure will lead to a burst through to 1.40 if there is a deal announced, which could occur in the next few days. Currently the noises from Brussels, and notably Paris, are not so reassuring. France is leaning very hard on Barnier not to concede too much or they will veto a deal – you have to think this is bluff: Merkel would send Macron to the naughty step if he played de Gaulle and scuppered 4 years of negotiations for some Breton fishers.
Oil moved higher yesterday afternoon amid signs of greater consensus around achieving a deal today as the full OPEC+ cartel convenes to figure out how to proceed with supply restraint in the first half of 2021. OPEC and allies are said to be leaning towards a rollover of current cuts with a gradual increase in output.
Under the current production cuts agreed earlier this year, output is scheduled to increase by around 2m bpd from January, however it is widely anticipated that OPEC and allies led by Russia will extend the current 7.7m bpd in cuts for another three months. Dissenting voices from the likes of the United Arab Emirates ultimately should be brought around by kingpin Saudi Arabia. A deal of some kind to extend current levels of output restraint is essential to keep WTI north of $40, with Jan contract currently trading above $45.
EIA inventory data showed a slight fall in US crude stocks, but gasoline and distillate inventories rose due to slacker demand for end products. Although crude inventories fell by 679k barrels, gasoline stocks and distillate inventories rose by 3.5m barrels and 3.2 million barrels respectively. Expect this trend to continue as slack demand persists over the winter. As we’ve been warning, near-term demand pressures will need to be overlooked by markets to sustain prices as inventories seem set to build over the next couple of months.
Neil Wilson is chief markets analyst at Markets.com
