Your weekly economic update from the team at FXD Capital
Inflation gears are slowly starting to turn, an inevitability many have expected. Rising inflation steepens yield curves, which cause a whipsaw of falling bond and equity prices, the latter from higher discount rates, which lower the present value of future cash flows. Safe havens from inflation come in specific areas, notably the stocks of basic materials and commodity suppliers. Results from mining companies showed increased profits from recent periods and hefty dividend payouts.
In 2021, global bonds have suffered their worst start to the year since 2013. Long duration bonds bore the brunt of the week’s sell-off, with the 25-year gilt incurring losses of 10% year to date. A look east contrasts with the west; in aggregate, Chinese debt has rewarded investors with 1.4% of gains for the year.
Spare some thoughts for investors in Austria’s 100-year bond, which is no doubt judiciously marked in calendars for its 2120 maturity. Austria’s Century Bond has fallen in price by 18% year-to-date, ravaged by inflation, which preys on long-dated bonds. In 2014, the UK cleared up its tranches of long-dated perpetual bonds, principally issued to fund war efforts. £100 in 1914 would have been worth £3,000 in 2014, but holders would have only been paid back the original par, albeit with 100 years of coupons in-between to soften the blow.
What makes someone invest in a 100-year bond at current low yields?
Long duration maturities are popular with liability-matching institutions, such as insurance and pensions. The paucity of yield for such a long-term commitment has ramifications that have a ripple effect that eventually reaches consumers. Be it from higher premiums for insurance products or lower annuities on pensions and CETVs.
Markets have seen red this week; it’s too early to call whether this is a sign of a longer-lasting trend. Naysayers have been calling for a correction ever since the COVID bounce; sentiment this week has been affected by the inflation bells and black swan events like the Texas power crisis.
The ONS reported consumer goods prices rising at an annual rate of 0.7% in the 12 months to January, 10bps up from December’s level; expect increases to continue as oil price rises and VAT cuts prevail over the coming months. The conditions amount to commentators agreeing that the Bank of England’s 2% inflation target will be passed by autumn, but expect downward pressure from job cuts and competitive pricing as the economy opens up.
Closing out the week on Friday, January’s retail sales fell 8.2% on the month, missing expectations (-2.6%). The fall was double the previous amount of 4.1% and gave a stark reminder of lockdowns’ economic ramifications.
Minutes from the Fed’s January meeting showed concern that the threat of subdued inflation may be greater than the alternative danger of escalating prices. Participants were no doubt mulling over the impending $1.9 trillion federal stimulus package. Interestingly, the minutes show divergence with broader market sentiment, which seems to follow the latter narrative path of rising inflation.
In a shortened week, there was no let-up in the release of data. Jobless claims rose to 861k, its highest level for four weeks. Most pertinent within the figures was the sharp rise in federal pandemic unemployment assistance claims, which are typically the self-employed and gig economy workers.
January Retail sales were up 5.3% on a seasonally adjusted basis against December, their highest jump in four months. The data provides food for thought for officials pondering new stimulus measures of the tangible impact of putting cheques in consumers’ hands.
Mortgage data also showed that Americans borrowed a record $1.2 trillion in the fourth quarter of 2020. If unchecked inflation is coming, house buyers are certainly getting themselves prepared by loading up on debt.
ECB central minutes enlightened us towards its commitment to keep a “steady hand” on stimulus measures, which hints towards a more long-term perspective for judging inflationary effects. With its bond-buying programme (€1.85 trillion) expected to last until next spring, the hope seems to be for a quiet year of interventionism.
Consumer confidence rose 0.7 to -14.8 in February, despite Europeans being amid prolonged lockdowns and frustrations about vaccination rollouts.
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