International Communique No. 323 – 1st of February 2022
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MARKETS FLUCTUATING WILDLY
The Fed’s announcement of impending rate rises and a variable batch of corporate earnings triggered a turbulent time. Fluctuations in equity markets were particularly fierce. Intraday swings of -5% to +5% were visible on indices. Tensions in Ukraine were compounded by the IMF’s downgrading of its global economic growth forecast plus uninspiring guidance figures and imminent monetary tightening – with the Fed switching to a more hawkish policy as it seeks to put a lid on inflation.
The Fed held its benchmark interest rate during its late January meeting. Simultaneously, Chair Powell confessed that it could take a long time to get inflation back at its target while acknowledging that supply chain glitches had been worse than expected. These indications were taken to mean that rate lift-off could be as early as March. The market has since tried to discern the pace of these rate hikes. Powell was silent on the precise timetable, although he did state that he had plenty of wiggle room to act. Fed funds futures suggested a 94% probability that a five quarter-point hike may be seen this year. The message is clear: the Fed is now 100% focused on fighting inflation. PCEs rose by 5.8% year-on-year in December, in line with expectations. This change in direction is unlikely to hurt small and mid-sized local firms but will remove significant support from big global firms.
Staying with the US, economic growth was again solid in the fourth quarter, rising by 6.9% year-on-year. Spending on services accounted for the 3.3% increase in personal expenditures. Over the whole of 2021, GDP grew by 5.7% – its strongest increase since 1984.
The global economy is robust enough to cope with higher interest rates. Abundant household savings and strong hiring trends are expected to sustain growth in consumer spending in spite of the temporary decline in purchasing power.
The financial publication by Apple, which set a new revenue record – nearly USD 124 billion in three months – did bring some good news. So did LVMH, whose sales soared to EUR 4 billion and net profit to EUR 12 billion in 2021, streets ahead of pre-pandemic results.
The focus will now be on the ECB meeting and several economic indicators, including eurozone inflation and the monthly jobs report out of the US. Some big names will also be reporting, including Google, AMD, Amazon, Paypal and Meta Platforms. Chinese, Taiwan and South Korean markets will be closed for the Lunar New Year.
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