These days it seems that everyone is waiting for the US Federal Reserve to end its emergency pandemic QE program of $120bn asset purchases each month and start hiking its Fed funds interest rate…everyone that is except other central banks. The Norges Bank of Norway became the first major western central bank to increase interest rates after the Covid-19 pandemic in September. The bank hiked its rate by 0.25% from its record low of zero, citing economic activity that was above its pre-pandemic level and the need to counter a build-up of financial imbalances. More recently this month, the Reserve Bank of New Zealand joined the club by also raising its cash rate for the first time in seven years by a quarter of a percentage point to 0.5%. Both countries share something in common, they have managed to avoid the worst of the coronavirus pandemic and consequently their economies have recovered quickly from their 2020 recessions. Whilst both Norway and New Zealand are major developed economies, neither are part of the G20. In fact, it has been the emerging economies in the G20 that have been leading the way with interest rate increases, albeit each for their own idiosyncratic reasons. Astonishingly, the Central Bank of the Republic of Turkey was the first to unexpectedly hike its benchmark interest rate last year in September 2020 by a staggering two percentage points from 8.25% to 10.25%, following a surge in economic growth driven by a near doubling of lending by state banks to face down the initial wave of the coronavirus. However, this cheap supply of credit stoked already high double-digit inflation, piling pressure on the Lira and forcing the central bank to act. The CBRT bank rate is now 18.0% and the second highest in the G20 behind Argentina, whose economy is grappling with similar issues and whose central bank also hiked interest rates last year. Since then, Russia, Brazil, Mexico and South Korea have joined the hiking cycle and started raising their interest rates. All of this is in stark contrast to the Euro Area and Japan where central bank rates have been negative for years and were undisturbed by the pandemic, stuck at -0.5% and -0.1%, respectively. It is difficult to see anything changing any time soon with these monetary policy pariahs. Which brings us back to the Fed, who are still caught in emergency pandemic mode despite rising inflation risks, but whose September dot plots have hinted at the prospect of a Fed funds rate lift off in 2022 or 2023. So the waiting game continues but we are edging ever closer to this elephant in the room joining the G20 rate hiking party.

• US equities fell the most over the course of September, as rising bond yields and the potential for tighter monetary policy triggered sharp sell-offs in higher valued assets, such as large-cap technology names.

• European markets also fell but to a lesser extent than the US, however UK and Japanese markets delivered flat to positive returns owing to their higher proportion of better value, less interest-rate-sensitive companies.

• Chinese equities also achieved small positive returns, as further monetary stimulus, somewhat quieter regulatory news, and cheaper valuations attracted investors into the space.

• Sovereign bond yields were higher on the month on the back of rising inflation expectations. Given bonds’ inverse relation between yields and prices, the asset class generated negative returns on the month.

• Investment grade and high yield credit indices were mixed on the month as despite credit spreads widening for both, the interest rate sensitive nature of the former led to negative performance.

• In Emerging Market Debt, the index of sovereign bonds issued in dollars finished the month in negative territory due to its high correlation with US treasury bonds.

• The US Dollar Index continued its 2021 gain by climbing 1.7% in September, as a risk off sentiment hit markets, with treasury yields rising in response to the Federal Reserve announcing preparations to start tapering its $120bn treasury and MBS purchase programme.

• WTI Crude Oil rose 2.6% on the back of supply disruptions and a surge in demand. The recent dramatic rise in natural gas prices has also made oil a relatively cheaper alternative for power generation. WTI is now up 57% in 2021.

The economy is expected to grow in 2021 at its fastest pace since the 1980s as pent-up consumer demand from record high levels of savings boost consumption, trillion-dollar fiscal stimulus packages work their way through congress and the economy, and as the Fed maintains its accommodative stance. Employment gains have slowed recently with the Leisure & Hospitality sector stalling in August from the spread of the Delta variant.

Inflation is now trending above the ECB’s 2% target and is not showing any signs of peaking yet, spurred by rising energy prices, supply chain bottlenecks, and the end to a temporary German pandemic-relief VAT rate cut. Despite this, the ECB is maintaining a dovish and accommodative stance. The economic rebound has gathered momentum as the bloc’s covid-19 vaccination programme surpasses many other leading countries including the UK.

The UK is displaying similar inflation trends to Europe but higher energy prices and an HGV driver shortfall on supply chains are hitting consumer prices harder after Brexit. Fuel supply issues have caused a run on petrol stations. BOE is turning more hawkish and indicating the prospect for rate hikes to begin next year if inflation trends persist/worsen, despite peaking economic growth albeit from a high base. Daily coronavirus infections remain high, but hospitalisations remain low thanks to a largely immunised population.

Japan is struggling to control a prolonged coronavirus infection wave driven by the spread of the Delta variant and in the wake of the Summer Olympic Games which has exacerbated the problem, causing Prime Minister Suga to resign from his post meaning a general election must be held before the end of November. Despite substantial monetary and fiscal policy support, a vaccine-sceptic population has thus far prevented a significant economic rebound in 2021. Consumer price levels are struggling to recover from their deflationary territory and are significantly lower versus G10 counterparts.

Chinese economic growth has rebounded strongly to between 8-9% this year, far ahead of any other major economy, but it is now decelerating quickly driven by declining retail sales, a struggling property sector, and a current Delta variant endemic. The PBOC is expected to ease liquidity conditions and potentially cut interest rates. Credit impulse levels are near cyclical trough and could prompt policymakers to further boost economic and credit stimulus.

Most emerging economies have found themselves lagging the global vaccine rollout programme with most of the poorest EM populations currently largely unvaccinated. Despite a buoyant global economic recovery in 2021 as broad economic momentum gathers pace, the BRITS economies are still expected to grow at a slower pace than their developed market counterparts in the US and UK where policy support has been greater.

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