The US Federal Reserve is expected to announce that it will begin winding down the bond-buying program put in place last year, at the end of its 2nd to 3rd November 2021 policy meeting. Investors increasingly expect Fed officials to start raising the benchmark interest rate, which is currently just above zero as soon as the middle of next year.

The Bank of England will also be having a policy decision on 4th November 2021. Governor Andrew Bailey has said that policymakers will have to contain inflationary forces, prompting financial markets to anticipate an interest rate increase either next week or just before Christmas.

Now, some investors are wondering whether Federal Reserve Chairman Jerome Powell and his colleagues are making the same mistake as five decades ago. They are aggressively pushing for a return to the pre-pandemic labour market of half-century-low joblessness despite widespread worker shortages, rising wages and surging inflation.

Fed policymakers’ meeting this week is expected to decide to scale back their massive bond-purchase program as the economy continues to recover from the pandemic.

Powell acknowledged recently that the inflation risks are clearly to the upside but he stuck with his base case that price pressures will eventually ebb as supply-chain kinks are worked out. The Personal Consumption Expenditures Price Index, the inflation gauges the Fed targets, rose 4.4% in September from a year earlier.

The risk for Powell is that Covid-19 has wrought more lasting changes to the jobs market than he believes, making it difficult to return to pre-pandemic levels without spurring inflation. Some service-sector jobs may be gone forever, from downtown restaurant workers who used to serve fully staffed office buildings to staff in hotels that are no longer packed with businesses and other travellers.

The US employment report, which is coming out on Friday, is expected to show job growth accelerated in October after two straight months of disappointing payroll figures. An improving health situation and strong demand should support hiring, but labour force participation remains suppressed - a persistent obstacle for companies hoping to increase headcount.

China economic activities slow down

Power shortages and elevated raw materials prices are choking China’s recovery. Even as declines in production and demand depicted by October’s official PMI data were broadly in line with seasonal patterns, the gauges of supply constraints, inventory and delivery time deteriorated by many degrees. The recovery in the service sector was also damped by the Delta outbreak.

China’s economy showed signs of further weakness in October as power shortages and surging commodity prices weighed on manufacturing, while strict Covid controls put a brake on holiday spending.

The official Manufacturing Purchasing Managers’ Index fell to 49.2, according to the data released on Sunday. This is the second month below the key 50-mark that signals a contraction in production. The non-manufacturing gauge, which measures activity in the construction and services sectors, dropped to 52.4, well below the consensus forecast.

The PMIs reflect that the economy is under pressure from both supplies and demands. Manufacturers are struggling with electricity shortages and rising costs, while consumer spending remains weak as the government’s Covid-zero approach means a tightening of restrictions for travels and social gatherings to contain frequent flare-ups of virus cases.

Another worrying sign in the data was the pick-up in inflationary pressure in October. Both input and output prices for manufacturers jumped, suggesting producers are passing on higher costs to customers. Producer-price inflation is already at its highest level in almost 26 years. 

The turmoil in the property market is another big drag on the economy. Housing sales have dropped, home prices are falling and the debt crisis of property developer, China Evergrande Group, is spilling over to the industry. 

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Fullerton Markets Research Team
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