15th November 2021
The Cambridge Weekly – 15 November 2021
Central banks struggle with messaging
Following five weeks of global equity markets inching higher every week, risk asset markets slowed even though, for once, economic data was actually offering reasons to believe that the worst of supply chain constraints may be behind us. From as far as we can make out, it was once again the bond markets that distracted stock markets. We feature a separate article this week on the topic, because we had the unusual combination of inflation adjusted yields falling and nominal yields rising slightly. What can be read into this, is that inflation concerns continue to rise, but there is now less of an offset through rising growth expectations.
The bad kind of Inflation
We are in the middle of the biggest inflation bout in years as ubiquitous post lockdown supply issues are sending prices skyward. A recent report from the Bank of International Settlements suggests that this inflation has become self-reinforcing; Bottlenecks have caused suppliers to build buffers at multiple stages of the chain, exacerbating supply problems that drive prices. And yet, monetary policy in the developed world seems as loose as it has ever been.
China less isolated?
How quickly the narrative can change. Over the past few weeks, western media has been filled with talk of China’s great retreat from the world. President Xi Jinping is one of the only major world leaders to not be present at COP26, despite his country having a larger share of global emissions than any other. This looked like the culmination of a trend going back beyond the pandemic. After decades of integration and opening up, China began closing its gates (literally, in terms of covid rules at least) and turning inward – pursuing self-reliance and a decoupling from the US-led world economy.