International Communique No. 339 – 24th of May 2022


The markets have been full of turmoil recently – dominated by inflation, rate hikes and recessionary fears. The S&P 500 is dangerously testing a bear market threshold (-20% from highs), with investors wondering if it will stray beyond that point. Hurting share-price performance were earnings reports from US retail giants announcing a contraction in margins due to rising costs, reigniting fears that inflation will take a heavy toll on the economy.

Inflation is indeed starting to look ingrained in the US, making it the main concern for corporations. To date, a total of 445 S&P 500 constituents have released quarterly financial results; of these, 377 have mentioned ‘inflation’ in their messages. The mood of anxiety is increasingly reflected in earnings guidance, which has been revised down to 4.3% from 6% a month ago – far slower than the 8.3% increase in consumer prices. In contrast, revenue guidance remains upbeat. A 9.8% year-on-year increase is estimated for the next quarter.

This balancing act between growth, inflation and interest rates will be difficult to pull off, but Powell still believes that the US economy is capable of withstanding higher rates without tumbling into recession. The labour market is robust, whilst household spending and business investment remain strong. Growth for the US economy is estimated around 2.5%, which would keep the country in expansionary mode for another year.

In Europe, the latest inflation number was stable at 7.4%, but price rises are now seeping out beyond energy and food. This will probably prompt the European Central Bank (ECB) to start raising rates in July to offset the risk of an inflationary wage spiral. However, the ECB must be careful if it does not want to hamper economic growth, already burdened by the armed conflict in Ukraine.

China could be the boost the market is waiting for. Due to lockdowns, the Chinese economy is currently running in a low gear, and supply chains have been heavily disrupted, clouding the outlook for global growth. In contrast, the pandemic seems to be dying down, and the government is doing everything possible to ensure the domestic economy keeps expanding. Recently, Beijing cut the benchmark reference rate for the second time this year, pledging to take further supportive measures to combat the economic slowdown, giving markets the shot in the arm that they needed as the week tailed off.

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