Your weekly economic update from the team at FXD Capital
The prior week has undoubtedly been an interesting one for markets, combining Omicron virus concerns and more central bank posturing.
Markets reminded investors why they hold government bonds when stock markets all fell on the announcement of the Omicron variant in South Africa; prime government bonds naturally rallied on the back of the news. As the information has evolved, markets this week have reacted erratically, with a series of sell-offs and mini rallies as news reaches us about the spread of Omicron. Lockdown “heroes” such as Ocado and Delivery Hero saw their share prices rally, while airlines (the ultimate COVID proxy) bore the brunt.
Powerful statements from the Moderna CEO that vaccines may not work against Omicron particularly spooked the market
Perhaps as a poorly timed coincidence, on Tuesday, Jay Powell threw more uncertainty into the mix when he signalled his support for a faster taper of the Federal Reserve’s asset purchase programme. He also gave a mea culpa for “transitory” inflation, requesting that its usage ceases for describing current events. Before his testimony before the Senate, markets had rallied back to where they began pre-Omicron, potentially off the back of traders believing the new variant would lead to more lockdowns and, thus, more money printing. In reality, his speech would have been prepared weeks ago, and most governments now are trying to adopt consistent messages to COVID instead of contradictory about-faces.
Bank of England economist Catherine Mann raised a valid point that Omicron may be a further catalyst for inflation drivers. The thesis is that any lockdowns or supply chain disruptions will stifle consumers switching spending from goods to services. So what’s driving inflation now is inflation of goods and the potential stagnation scenario where prices and wages are rising, but growth is not necessarily going to follow in tandem.
2022
Looking ahead to 2022, in my opinion, it will be a year with less buoyancy than 2021. The release from lockdowns gave a catharsis that put a sheen on things; the inevitable growth figures fuelled that, but again, masked by apples vs pears comparison with 2020. Everyone now feels more sanguine, and there seems to be trepidation from everyone that either there will be a random and large stock market crash, or when interest rates invariably rise, a domino effect rattles all sides of the economy.
When this column is prepared in a year’s time, we will most likely be looking at rates above where they are now. Call GBP accounts may also start with a “1” in front of the decimal point. The government aims to dig their way slowly out of their debt holes without spooking markets too much. While governments can print money to pay higher debt loads, the tax burden and personal borrowing burden present the steepest cliff. Consumers and borrowers almost seem programmed to believe interest rates are low forever. Speak to anyone below 40 about interest rates in the early 1990s, and they think you’re joking. While those days may be long gone, it’s the moral hazard element that’s worrying; those borrowing right at their capacity may have ignored doing a rudimentary stress test on the delta of interest rates doubling.
For that, I think 2022 will come with more pain in consumer markets than in corporate ones. The UK, in particular, is relying on the masses to tighten belts and replenish treasury coffers, but there are large swathes of the economy that are living on the edge of their means – at all scales of the income spectrum.
Business-wise, it’s likely that supply chains will get back to a degree of 2019-normal next year, which will help companies remove some of the clouds of uncertainty. However, weaker corporates will be more worried about rate rises due to the reliance on junk bonds, an asset that, incidentally, had its largest fall this week since February 2020. Could it be the canary in the coal mine? Boring old debt I think will be the market buzzword of 2022,vs the more expansive themes since recently, i.e., meme stocks and green energy!
Something that will be a long term observation is the devaluation of hard currency over time. While currency is a zero-sum game, in so much that one goes up and the other goes down, the long-term prospects of USD look weak due to the amount of money printing incurred recently. Doomsayers talk about a move to crypto as a safe haven or back to a gold standard as if the USD will crash immediately. On the contrary, I think USD will prevail because it will always be the trade currency, and the US is a trade-friendly country, compared to the erratic policies seen in China, which was making moves recently to become the currency issuer of trade.
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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