Exposure rates of the Dorval Asset Management Range – 5th November 2021

Central banks have been blowing hot and cold on the bond markets as they stand sometimes hesitant in the face of inflation, but equity investors have latched onto the key message i.e. the monetary authorities do not want to jeopardize current economic momentum.

As expected, the US Fed put an end to the monetary “whatever it takes” attitude in the US. The situation on the job market continues to brighten, and the summer’s nasty economic surprises, due to the Delta variant and the shortage of components in the automotive industry, are now making way for a clear reacceleration (cf. chart 1). After lethargic GDP growth in the third quarter (+2.0%), the Atlanta Fed’s GDP Now indicator expects a sharp upturn in 4Q (+8.5%).


US job market improves, and this summer’s economic blip is a thing of the past

Unemployment / Citi’s Economic Surprise Index


The Fed is set to taper its asset purchases, working its way to a gradual halt in June 2022. However, looking at short-term rates, Jerome Powell suggested that the Fed was giving itself some time to observe the situation out to the middle of next year. So for the Fed, it is crucial to wait.


Somewhat more surprisingly, the Bank of England decided to hold rates unchanged at its latest Monetary Policy Committee meeting, while some of its members – including governor Andrew Bailey – had recently advocated action to tackle rising inflation. The main argument to explain the decision against tightening is significant: a narrow majority of committee members believed that supply bottlenecks and shortages driving inflation are potentially bad news for growth, and particularly consumer spending.


UK bond yields plunged again (cf. chart 2) in the wake of this decision, dragging down most developed economies’ showings as a result. The recent dip in long-term yields was also driven by a drop in commodities prices. We may well be seeing the paradoxically stabilizing effects of the real estate market slowdown in China, which helps regulate price rises on certain commodities.


Drop in UK yields after Bank of England’s surprise move to hold rates steady

10-year Gilt / 2-year Gilt / Bank of England rates


Next year will provide some other key monetary events, and the trend towards a slow climb in interest rates should be confirmed. However, the central banks have reiterated their strong pro-growth slant, so it is not surprising that the equity markets pursue the recovery initiated in mid-October. We have organized our portfolios to fully draw on this rally.



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