Your weekly economic update from the team at FXD Capital
Contagion is an oft-used word to describe a series of events unfolding, with more rapid escalation at each turn. It’s prevalent in markets, along with another abstract favourite; “canary in the coal mine”. The ever increasing stress of potential tapering impacting all-time high stock markets is the constant flame for moths who spend their time wondering what will be the domino that starts everything falling.
Because everything is seemingly “priced in” to markets, it’s not just a case of an interest rate rise that rings the bell for a series of events unfolding. Instead, you look to the strange serendipity of life to pull the shooting pistol. March 2020 was a textbook example of this; everyone already knew about Covid-19 but skipped through the headlines in the preceding months to catch up on Brexit, Trump, Love Island, or whatever. It should have been priced in, but it wasn’t, and once the proverbial hit the fan, we witnessed contagion in action. It’s like a cancelled train; everyone at the station looks fraught, concerned and busy pacing around – but no one has a clue what happens next.
The reason for this preamble is that everyone is like a vulture looking for the carcass of contagion right now. That’s why this week, Facebook, the death star juggernaut of social media, lost 20% of its market valuation purely because engagement statistics have dipped. The loss in value was equivalent to the annual GDP of Greece! Such moves are erratic and a tad harsh for a company that’s been printing money over the past decade, but it goes to show just how tetchy things are right now. Everyone wants to call the next tipping point event, be it Covid, Evergrande or subprime mortgage fraud. It gives the impression that this year will feel like a game of bulldog; there will be many events like Facebook that cause huge swoons and relapses. While writing this column and browsing the weekly news, the headlines seem to be in constant immediacy: markets tank, markets recover, rinse repeat.
Back to more pragmatic updates, on Thursday, the Bank of England rolled back the years by announcing its first consultative rate rise since 2004. Rates now sit at 0.5%; the psychological post-2008 “par” seems like a mouse versus the elephant of inflation, which is currently forecast to hit 7.25% in April. One of the five voters wanted rates to go up to 0.75%, which would seem inevitable over the coming months, so eventually, they will get their wish. 2022 is set to be a challenging year for UK households, with price increases across the board. It’s hard to see how rate changes may usher in reduced spending by consumers; my guess is that the primary concern of policyholders now is to ensure the debt bubble doesn’t burst, as opposed to any kind of supply-driven policies. Disposable household income is set to contract by 2% this year, the effect of which may result in GDP growth flatlining as belts are tightened.
Eurozone inflation rose by a record 5.1% in January, dovetailing seamlessly with experiences in markets that came out of lockdown sooner. President Lagarde adopted a hawkish stance towards inflation and claimed that rises were “tilted to the upside” and appear to be reversing sentiment from last year, which seemingly put to bed any chances of rate increases in 2022. Consequently, EUR strengthened and movies sold off. The ECB target rate is around the 2% mark, first eclipsed in late summer 2021. The bank’s forecasts do look slightly aggressive, though, with it predicting that prices will fall to a shade below the target by the end of the year. I have a feeling that those forecasts may be slightly aggressive.
If inflation looks frothy in the UK, then spare a thought for Turkish citizens, which saw a 48.7% increase in January. Despite the prevailing winds of price increases, president Erdogan has been fanning the flames by cutting benchmark rates, despite the logic suggesting the inverse path. Borrowing rates are at 14%, and the Lira lost 44% of its value against the dollar in 2021. While a weak currency may help countries dig themselves out of holes through exporting, it causes untold pain for consumers who lack savings, tangible assets and access to foreign currency markets. It seems there is an increasing orthodoxy of falling relative value of emerging market currencies as faith diminishes in the objectivity and credibility of their central banks.
All the best for the week 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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