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Please see below Daily Investment Bulletin received from Brooks Macdonald yesterday, which provides a pertinent update on the markets, with reference to supply shortages and transitory inflation.

What has happened

US and European equity indices recorded small losses as investors looked ahead to today’s US CPI release and the start of the US earnings season. There was plenty of movement within government bond yields with the US 10-year Treasury yield now off its recent highs, trading at 1.58% ahead of the key inflation data point today.

Fedspeak and inflation

Vice Chair Clarida will shortly end his term at the Federal Reserve but yesterday signalled that the time was approaching for a tapering announcement. Clarida followed the transitory inflation narrative but recognised market concerns that inflation risks are now poised to the upside rather than the downside. Atlanta Fed President Bostic, who is known to harbour more hawkish views, said that price pressures were spreading amongst the CPI basket and that they looked more entrenched than previously believed. Today’s CPI figures are the last inflation release before the Federal Reserve considers monetary policy in their November meeting. Market expectations are for Core CPI to hold steady at 4% year on year and for CPI to also mirror the last release at 5.3%. It will take some months for the recent run up in energy, used cars and commodity prices to come into the data which may mean a downside miss on these numbers is shrugged off by a more hawkish market.

Apple and Semiconductors

One of the highest profile shortages during the pandemic has been semi-conductors and yesterday Bloomberg reported that Apple was struggling to acquire sufficient chips to meet its iPhone production targets. There was hope in recent months that more supply would come online to meet the surge in demand however this is yet to filter through to production creating fears that the problems will continue well into 2022. A lack of availability of chips has also catalysed another leg higher in used car prices over the last month and looks set to continue to cloud the inflation picture for Q4.

What does Brooks Macdonald think

The chip shortage is reducing the supply capacity of most technology hardware suppliers and auto manufacturers. The shortage risks reducing economic output as well as creating inflation which will place further pressure on central banks to raise rates ahead of the risk of stickier inflation.

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