César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
No more Tina
Consumer prices (CPI) in the US rose by the highest rate in four decades, at 7.5% year-on-year in January. Crucially, beyond Omicron and supply-chain disruptions, ‘excess demand’ is contributing to these inflation pressures to a degree. However, we expect this excess demand to gradually erode as pandemic-related fiscal support is withdrawn.
That said, the inflation surprise does slightly raise the risk of a 50-basis-point (bp) US interest rate rise from the Federal Reserve in March as underlying price pressures have broadened. US bond and equities markets sold off as a result, with the 10-year US Treasury yield at one point rising to over 2%, its highest level since 2019.
Still more strikingly, the two-year US Treasury yield shot up by as much as 25bps last week, the largest such move since 2008. The flattening of the yield curve, which has even inverted on some metrics, continues to suggest that markets are worried about a potential policy mistake. The universe of negative-yielding bonds has declined by two-thirds. We are short duration but monitoring the three-to-seven-year portion of the yield curve for buying opportunities.
In other central banking news, the president and chief economist of the European Central Bank (ECB) warned against “hastily” hiking interest rates, stressing the differences between the euro area and the US. Yet there is fundamental case for ECB rate rises in H2 2022. Elsewhere, credit has started to rebound in China on the back of lower rates and frontloading of local government bond issuance.
For now, this is an insufficient enabler of an economic rebound, given that households’ credit demand remains negative. But it further confirms that China’s monetary cycle is at the polar opposite point from the US’s, underscoring our positive stance on Chinese sovereign bonds. Elsewhere, the Biden administration’s list of Chinese companies that US investors are banned from trading has expanded to encompass healthcare, including non state-owned names. Back home, US law enforcement seized USD3.6 bn worth of bitcoin that was stolen in 2016, the largest financial seizure ever.
French president Macron announced plans for up to 14 new nuclear reactors in the coming decades, as part of a strategy to meet net-zero greenhouse gas emissions targets. This expansion of nuclear energy is a key theme in our 2022 outlook.
France will also aim to increase its solar power capacity tenfold by 2050 and build 50 offshore wind farms. Meanwhile, mixed news continues to come in from Russia/Ukraine, with initiatives led by France and Germany buying some time at best while the US continues talking tough. Finally, earnings reports continue to reveal big differences among stocks in terms of beating or missing forecasts. This should be a good environment for active managers.
