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Global equities posted gains last week for the third week running. They ended the week up some 1.1% and are now all but back to their high in early September. The swift recovery from the recent correction, as discussed previously, has been very likely down to TINA (There Is No Alternative) and continued gains in corporate earnings.

Last week provided further support on the second front. Third quarter earnings growth forecasts for the US have risen further and are now up to 30% versus 25% at the start of reporting. This coming week, the tech giants report and a key question is whether they will have continued their stellar performance. The earnings season is also now underway in Europe and the UK and growth here looks set to be of the order of 20%.

Crucially, many of the largest companies do seem to have pricing power and able to pass onto consumers the cost increases they are now facing. Short term, this is clearly good news for earnings but only adds to the scale of the inflation problem which central banks are now waking up to, somewhat belatedly.

In the US, Fed Chair Powell has admitted in recent days that supply constraints and elevated inflation are set to last longer than expected and well into next year. Indeed, at its meeting next week, the Fed looks all but certain to start tapering its QE program, although the first rate hike still looks unlikely to occur until late next year.

The UK is well ahead of the US in its monetary tightening plans and the MPC looks very likely to raise rates next Thursday from 0.1% to 0.25%. Having been caught out by the MPC’s hawkishness, the market has adjusted its expectations rapidly and is now pricing in rates rising above 1% by as soon as next autumn. While this can be far from ruled out, particularly given the hawkish pedigree of the Bank’s new chief economist and the uncertainties surrounding the outlook, it does look on the high side.

The latest UK economic data did little to clarify the picture. Inflation unexpectedly fell slightly to 3.1% in September but still looks set to head up to 3.5-4% next month and probably peak in the spring as high as 5%, before retreating again.

Meanwhile, retail sales volumes posted an unexpected 0.2% decline in September, their fifth consecutive fall. Even so, they still remained 4% above pre-pandemic levels. Business confidence, by contrast, surprised on the upside in October, increasing on the back of an upturn in optimism in the service sector.

The outlook for UK growth hinges critically on Covid, the supply bottlenecks and also, to a much lesser extent, on Wednesday’s Budget. Much has already been written and leaked on the latter, so the comments here will be brief – not least because Wednesday’s events are likely to be rather less important for the market than those of the following Thursday.

The Budget will be the third major fiscal event of the year. The Budget in March saw significant tax hikes announced, with personal income tax allowances and thresholds frozen and corporation taxes hiked from 2023. This was then followed in September by a 1.25% rise in national insurance rates for both employees and employers to fund extra spending on the NHS and social care.

The main focus this time will be on government spending and setting out new longer-term fiscal rules. The good news for the Chancellor is that the economy has rebounded faster than expected and the budget deficit this year is undershooting expectations. It is now forecast to come in at a mere £200bn or so, down from £320bn last year.

This undershoot gives Sunak some room to indulge his boss’s spendthrift inclinations and new money has apparently been found for areas such as health, transport and education. All the same, the Chancellor’s largesse will be limited by his desire both to put the public finances back on a sustainable footing and to give himself room for some give-aways further out, ahead of the next election.

Rupert Thompson

Chief Investment Officer