Your weekly economic update from the team at FXD Capital
On Wednesday, US consumer prices printed a rise of 7% on the year for December 2021, setting a new precedent that hasn’t been broken for 40 years. Incidentally, wholesale prices grew by 9.7%, the delta between that and the consumer index possibly highlighting the hoops being jumped through by retailers to maintain order with customers at the expense of margin erosion.
Equity markets fell on the news, but by a far lower margin than seen during the previous month. Energy is the main issue to contend with for consumer inflation, with some UK households potentially seeing four-figure bill increases during 2022. Each month when inflation prints and sets another record, the doves appear and claim it’s all still transitory. Remember, the yearly delta will only normalise once there is a clear year space without hard lockdowns. Nevertheless, the pressure on forthcoming inflation data to start abating is immense, and markets seem poised tentatively, again near all-time highs, to respond in an unknown direction.
Some optimism in 2022 is that Covid may finally be entering its death throes. The UK is seen as the pacesetter for transitioning from pandemic to endemic, with the English government’s poker bluff in December seen as the right move. However, other markets are drafting their timelines to lag the UK, with the latter’s booster rollout and geographic location fostering the petri-dish of omicron abundance.
News also abounded regarding Federal Reserve decisions for 2022. The consensus from swap markets seems to have been reached for three separate increases of policy rates this year, with 1.0% being the endpoint before 2023. With inflation forecasted to reside at 3.5% by the close, it will be intriguing to see the delta’s effect on prices, and indeed, broader behaviour.
Central bank support for asset purchasing has always been a non-consumer event in my eyes. While suppressed yields from central banks hitting the offer on bonds do seep through to lower discount rates and, subsequently, higher equity pricing, it doesn’t correlate to increased lending. Back in the day, QE was a sleeping pill for banks nursing balance sheet headaches post-Lehman Brothers. It was almost a face-saving exercise where zombie assets could be funded and left to rot, with the money never really seeping through into increased lending appetite. While lending rates could indeed fall, banks were always hamstrung by what they could lend out due to more stringent capital rules. I feel that removing asset purchasing support may only really hurt consumers when they look at their investments.
From the savers ‘ perspective, interest rates from the consumer and business side of things have not budged too much. The litmus test will be when a sizeable high-street bank releases the shackles from the par call rate of <0.1%. While notice and fixed-term accounts show nuance between different houses depending on their own balance sheet needs, the call account, in my mind, is always a bellwether for “macro” decision steering: it’s the cruise liner, to the fixed term’s tug boat.
However, going back to inflation, where its effects are seen in specific behaviours that only really arise during rampant inflation speculation. For example, markets like luxury goods (especially high-end watches) have a considerable demand for assets, resulting in the grey market offers (secondary sales) seeing 3x the regular retail price. Cars are also another area; some used cars, even with depreciation, are selling for higher than new prices. The delta is to compensate for the fact that while you can register for a new car, good luck getting some models by the end of the year. I wouldn’t amount this kind of behaviour to frantic buying in advance of the inflation apocalypse, but more so relating to the fact that many people from white-collar backgrounds have done well from Covid. As we advance, the only real line of sight for pain on their end would be a massive stock market crash or a burst bubble in speculative areas like cryptocurrency.
Pain is also not evident in the state of blue-chip corporates. The S&P500 group of companies is forecast for earnings growth of 22% in Q4 2021, with nine of its 11 sectors in the black. So consumers have primarily made hay, companies are doing just fine, so it must just be the collective national accounts wearing the loss?
All the best for the weeks ahead
Alex
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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