Your weekly economic update from the team at FXD Capital
24-hour news cycles have commoditised events into a daily slog, where the effects of everything are magnified to a level of critical importance. The result is a constant sentiment-see-saw between good/bad, fear/greed and growth/decline, continually exacerbated by the sheer amount of news and information we consume. Twenty years ago, the commuter into the city would perhaps read a paper on the train and then watch the evening news. Nowadays, technology has removed any respite and the day is a bombardment of notifications. While it’s not necessarily a bad thing to be informed about the world, the danger is that perspectives are being shortened by the increasingly salacious nature of how news and data are delivered.
Suppose we look at market news, especially around the current context of inflation. Each day, the movement of Treasurys, or stock indices, are commented about dramatically, which belies the longer-term context of markets. Prices being “whipsawed” or “battered” prompts images of the 1987, 2008 or 2020 crashes, when in actual fact, daily 1-3% rise/falls are par for the course with risk assets. If there were no jeopardy to investing, then there would be no returns at all.
Returning to interest rates and inflation, 2021 has been a Groundhog Day existence of constant flux concerning schisms between inflation and interest rates. Everyone is now an expert in the area, and commentators mark that we are in “uncharted territory”. But, if you zoom out, this has been a constant discussion for the past 12 years ago when the UK, US and Europe first entered a low rate environment.
News is more jolty and extreme now because we have more information around us. Everyone is a commentator; everyone can chime in, and for the better or worse, it results in a higher velocity of news. We become desensitised and polarised – inflation is necessary for economic growth, yet it’s currently painted as if it’s a terminal blight that we must eradicate.
The best thing to do is separate the signal from the noise. I’m experimenting with turning off social media news during the week, aeroplane mode from 8:00 pm and only using quality news sources to see how it affects my outlook.
Official figures from Wednesday confirmed that the UK economy contracted by 1.5% during the first quarter of 2021. The print was marginally better than the expected decline of 1.6%, and January’s lockdown was attributed to a 2.5% economic contraction alone. March’s month-on-month GDP figures show a rise of 2.1%, again beating the expected print of 1.3%.
Of the G7 nations, the UK’s economy has fared worst throughout the pandemic due to its reliance on consumption-led growth and the service sector. With Goldman Sachs predicting 8.1% growth for the year off the back of the improved Q1 figures, the UK may likely outperform its peers in 2021.
Wednesday’s Core CPI figures caused a stir in markets as the inflation spectre continues to haunt market sentiment. April CPI increased 4.2% year-on-year, a vast overshoot on the expected increase of 3.6%. Core CPI strips out food and energy prices, which arguably, could have resulted in an even higher number.
The alarming figures caused ruptures in markets, with long-duration equities (i.e. growth stocks) and bonds falling in unison.
To its credit, the Federal Reserve has continued to play a straight bat over the past couple of months regarding inflation, with calls that it is transitionary and unlikely to maintain over more extended periods. In some quarters, their points are valid; the year-on-year comparison we see now is against April 2020, a time when the whole world had voluntarily shut down. Comparing now to then is apples vs pears, and thus, we see wide fluctuations that deviate from typical trajectories.
Yet, on the other hand, the continual volatility in markets is a sign that the credibility of the Federal Reserve and other central banks may be waning. While there may be a vested interest in maintaining status quos and hoping that debt values gradually erode over time due to inflation, market participants seem to regard such hopes as dubious.
Despite all the clamour this week about inflation and the economy’s overheating, it was on the heels of last Friday’s job numbers. Job growth slowed to 266,000 additions on the month; versus 770,000 in March, US unemployment is now up to 6.1%. Sobering thoughts and another example of the daily news rush shortening our context.
All the best for the week ahead,
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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