Stock market investors ‘buy the dip’ as omicron concerns ease, US, German and Irish inflation hits fresh multi-year highs in November and financial supports are extended to the end of January 2022 to support the hospitality sector. All these stories and more are covered in this week’s insights update from BlackBee.
The short-term economic outlook has become more clouded over the past few months with weaker COVID related demand and supply bottlenecks causing economic activity to slow and inflation trends to remain stubbornly high. We saw evidence of both of these factors at play in last week’s economic data. On the growth picture the final release of Japanese Q3 GDP for Q3 showed the economy contracted by 3.6%, a bigger fall than initially forecast as COVID restrictions hit hard over the late summer. In addition October industrial production and factory orders in Germany painted a mixed picture for global demand – factory orders were down 6.9% in the month and although industrial production was up 2.8% in October this was only the third time this year that the indicator was positive.
As an economy, the Euro zone is heavily exposed to trade and the patchy growth picture here also points to weaker conditions in Asia, a region which the Euro zone trades heavily with. We’ve already seen this in the deterioration in the Chinese economy through 2021. Policymakers there acknowledged this slowdown last week by reducing China’s reserve requirement ratio for banks (the amount banks have to hold to deal with withdrawals), something which signals monetary policy might become looser in 2022 in an effort to deal with the country’s slowdown. This week’s Chart of the Week highlights how Chinese economic momentum has slackened as we’ve moved through 2021 just how pedestrian growth in China has been this year, underlining how much the economy now needs lower interest rates.
The other prominent economic theme last week was the continuing trend of elevated inflation rates. Irish inflation for example hit a 20 year high of 5.3% in November while US and German inflation rates hit 6.8% and 5.2% respectively – the highest since 1982 and 1992 respectively. How these elevated inflation rates affect central bank monetary policies is in our view a key issue for markets for the first half of 2022.
Equity trading remained choppy last week but markets managed to regain some poise after a trying December so far. Omicron nerves seemed to calm a little thanks to a preliminary study from Pfizer which showed that a third vaccine dose resulted in a 25-fold increase in the neutralising antibodies that attack the virus. The company also added that it was developing a new vaccine targeted specifically at Omicron and hoped to have this available by March. As has been the trend for a while now, US equities seemed the biggest beneficiary of this ‘Pfizer rally’ while the other main regional markets enjoyed smaller gains. Although inflation rates published last week remained elevated, the fact that the US November inflation print came in below expectations helped stocks hold onto their gains late in the week.
Sovereign bond yields restarted moving higher again last week as nervousness around the impact of the newest COVID variant began to wane while the rising inflation prints also acted as a force adding to increases in yields. Outside of the sovereign space, corporates managed to make some gains reflecting the stronger investor sentiment in the equity market. Emerging market bonds even managed to post decent gains despite Chinese property developer Evergrande defaulting on bonds previously issued to international investors.
Similar to risk assets more generally, commodities moved higher last week with oil again leading the charge for the complex on waning Omicron concerns although weaker economic momentum across the Asian and Chinese economies in particular still remains a downside risk for demand. In the metals complex, precious metals like gold and silver struggled as bond yields resumed their upward move while copper mirrored oil’s good week as omicron fears eased.
Forestry – McConalogue announces Forestry Budget Surplus despite fall in planting
The Minister for Agriculture Food & the Marine Charlie McConalogue recently confirmed that the government has had a “saving” of €7m despite the licensing backlog. The Irish Farmers Association (IFA) has said this is a direct result of the governments failure to meet planting targets due to the forest licensing debacle which has resulted in only 1,895ha of forest being planted this year. This represents a decline of 22% on 2020 and 46% on 2019. On November 26th the Minister of State Pipa Hackett announced there would be a regulatory review to draw comparisons between licensing systems across countries relevant to Ireland (southern Sweden, Germany, France, Belgium, northern Austria, and Denmark), recently the IFA announced that their own survey revealed that Ireland was the only country relative to those peers that required licensing for thinning and was one of the few countries that required a felling license. If the regulatory review returns with similar results, then this may pave the way for the removal of the license application process or at least a speedier process, either would be very much welcomed by the industry as a way to increase overall planting.
Hospitality – Covid Response Support Scheme (CRSS) and Employment Wage Subsidy Scheme (EWSS) extended to end of January.
Last week Paschal Donoghue announced that the EWSS and CRSS would be extended at full rates until the end of January to help businesses cope with the new restrictions which have resulted in widespread cancellations of events, Christmas parties and hotel bookings. Nightclubs can also once again avail of the CRSS as they remain closed over the Christmas period. The local authority rate waiver has also been extended to the end of March next year for the hospitality, entertainment, events, and tourism sectors. The extension of these supports should provide some certainty for these sectors which had feared a cliff edge to supports at the same time new restrictions were implemented. The announcements were welcomed by Ibec as a means of sustaining the hospitality and tourism industries into the new year.
Commercial Real Estate – Investment in CRE continues to grow and display resilience
Investment in CRE continued to grow and display resilience this year with €800m invested in the third quarter which is up 14% year on year and 12% above the 5-year average, bringing the total to €3.5bn for the first nine months of the year. Relative to the same period last year commercial property investment almost doubled from €1.8bn, with more investment deals occurring in the first 9-months of this year (140) compared to the whole of 2020 (138). The PRS sector continued to dominate making up 52.4% of total investments while activity by location was dominated by Dublin where 91% of investment activity occurred. This level of activity is impressive given pandemic-related global economic conditions especially as number of large deals were forward purchases which are particularly exposed to inflationary pressures through raw-materials, therefore highlighting the resilience of the sector.