The European Central Bank launches its ‘no taper’ taper, why the taper poses a headwind for equities and risk assets more generally as we move into 2022 and weaker H1 planning permission data hint at slower housing completions next year. All these stories and more are covered in this week’s insights update from BlackBee
In recent weeks we’ve discussed just how vital continued Quantitative Easing is to investor sentiment in a variety of markets. Last week’s monetary policy meeting at the ECB exemplified how sensitive central bankers are about weaning investors off Quantitative Easing. Despite the ECB agreeing to slow the pace of its asset purchases, President Christine Lagarde insisted this wasn’t a taper. Whatever about the nuance of ECB language, in our view this is the start of what will probably be a long drawn out taper to preserve the bank’s support for the economy and investment market stability.
Interestingly, there was a slight shift in the ECB’s tone about inflation going forward. Its inflation forecasts were upgraded across the board and contrary to its July meeting President Lagarde hinted that price pressures (i.e. inflation) could be more persistent than previously thought. This one could be one to watch in the context of this year’s debate around whether the uptick in inflation is persistent or temporary.
One can see why the inflation debate behind the scenes at the ECB could be getting more complex. Following on from the German inflation print hitting its highest level since 1993 earlier this month, Irish prices rose by 0.6% in August meaning that the annual inflation rate last month hit its highest since 2011 (see this week’s Chart of the Week). This is squeezing households’ purchasing power and also creates a huge problem for Irish savers who are now earning negative returns after inflation!
Equity markets slipped back last week with the main factor being taper chatter. As well as the ‘non taper’ taper announced by the ECB (noted above) St. Louis Fed President James Bullard also told the Financial Times last week that US monetary tapering “will get going this year”, echoing earlier comments from Dallas Fed President Robert Kaplan. From an equity market perspective it is fair to say that the tapering of Quantitative Easing around the world is not the same as increasing interest rates. Furthermore, we believe the time gap between tapering and first increases in interest rates will be a long one – as an example, in the last US monetary policy cycle the first interest rate increase from the US Fed came over two years after the end of its QE taper. However the slow tightening of financing conditions that will accompany tapers from the various central banks will represent a headwind for equities and risk assets more generally as investors head into 2022.
Sovereign government bond markets were caught in something of a tug of war last week between taper comments (pushing bond yields higher) and continued softer than expected economic data readings (pulling bond yields lower). All in all the result was a largely unchanged week for government bonds. In the credit space moves in investment grade, high yield and emerging market bonds were fairly muted, not helped by the softer backdrop for other risk assets.
On the whole commodities were little changed last week. In the oil market China responded to OPEC+’s unwillingness to ramp up supply by announcing that it would release barrels from its strategic reserves, a factor which resulted in a fairly topsy turvy performance over the week. Meanwhile returns in the metals space were quite mixed, reflecting the softer tone across markets overall in the period.
Commercial Real Estate – Office recovery set to get underway in H2 according to HWBC
Independent property firm HWBC published its first half review of the Irish office market last week. Not surprisingly the take up off office space declined by 81% in the 12 months to the end of June considering the lockdown conditions that were a feature of the Irish economy over the period. Prime rents in Dublin softened by 7% in Dublin to a five year low although this fall in rents was fairly modest compared to previous downturns in the Dublin office market. Looking forward it foresees office demand beginning to normalise from the second half of this year onwards with rents stabilising and beginning to grow again in 2023.
Housing – Weaker Planning Permissions visible in H1
The CSO last week produced data for planning permissions in the first half of 2021, showing them to be 15% lower compared to the same period in 2020. Of the permissions granted the majority were for apartments which is more and more becoming the norm as household density in Ireland trends lower over time. Over time planning permission numbers are a good predictor of housing completions so the data does suggest that any improvement in completion numbers over the next year or so will be slow and gradual, adding to the grinding upward pressure on house prices which we are seeing at present.