Your weekly economic update from the team at FXD Capital
As 2022 begins, markets restart with expectations for a turbulent and uncertain year. Despite the turmoil surrounding a global pandemic, investors’ proverbial boots were filled over the preceding two years due to the range of stimuli injected into markets paralysed by lockdowns and supply chain disruptions. As a result, most equity markets posted +20% annual returns with yields suppressed by excess money supply. However, for some, especially those who became captivated by markets since Covid-19, expectations are likely to disappoint in 2022.
The sentiment for 2022 seems to be for inflation prevailing and rate rises becoming more frequent and prominent. On the first market day of the year, 10-year US treasury yields increased by 13bps to over the magical 1.6% watermark. Quick out the gates, the move corresponds with the tectonic shifts occurring: yields rising from the troughs of the past decade and then the call-response of stock markets whipsawing as higher discount rates erode future cashflows.
Narratives always come unstuck quickly, and six days into the year, there have already been some spanners in the works. On Thursday, the one-two punch of weak services data in the US and higher jobless claims arrived, which reversed the selloffs permeating technology stocks (essentially the bellwether for rates going up). With Apple becoming the first $3 trillion company, it also highlights that the “big tech” behemoths are in a different market now to the disruptor/lockdown winners that have captivated the media over the past couple of years. With companies like Apple, Amazon and Microsoft becoming so valuable and constituting large parts of index funds, the fear is that a significant adverse event in one could be the catalyst that blows down the house of cards.
While Omicron, in some eyes, seems like a blessing, insomuch as Covid has mutated towards the ill effects of ailments that most people tissue up and soldier on with, its impact on economies have shifted. While in 2021, Covid was seen as a health event that paralysed economies with cost, fear and disruption, Omicron and its inevitable sequel variant is paralysing economies with gridlock. The US services and jobless data confirm this, whereby preemptive isolations (i.e. before a flight) and businesses completely beholden to policy (i.e. restaurants) leave specific sectors in quicksand.
While inflation prevails, the danger for policymakers in 2022 is that its effects are not egalitarian – some feel it, others don’t. The data shows this, one day, it’s pro-inflation; the next, it’s the complete opposite.
Before Thursday’s fork in the road, we were greeted on Wednesday by the Federal Reserve’s December meeting notes. Being perfectly candid, when these come up every month, I wonder if they are actually all the same, with recent comments of rates needing to rise “sooner or at a faster pace” giving me a feeling of deja vu. But, on the other hand, the overall consensus to withdraw from bond-buying shows that policymakers are all aligned but is a decision that brings no surprise.
From a UK perspective, markets had a quiet back to school transition, away from the surrounding political noise. However, a Bank of England survey of 3,000 CFOs found that confidence is low heading into 2022, and Q1 sales are likely to miss targets by 7.4%. Businesses are grappling with issues at both ends of their value chain – supply chain complexities and the leaking bucket of a red hot labour market and quarantine burdens.
If we take the UK situation within the context of capital markets, it suggests that caution will abound over the year. With capital taps turning off, optimistic borrowing and equity raises may taper off. Moreover, if the era of ample government support is also at an end, we may start to see more defaults, leading to banks increasing the credit criteria bar.
So, while it’s a new year, the sentiment now feels slightly the same as it was a year ago. For a brief couple of months over late summer, news bulletins returned to BC (before Covid) standard, and life returned. While things now, from an objective perspective, seem “fine”, there feels more like a Stockholm Syndrome type reaction where since Omicron hit, we have retreated to the warm, familiar blanket of lockdown hysteria.
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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