ECB guidance on interest rates turning as clear as mud, Europeans save €1 Trillion over the course of the pandemic and TUI expects summer holiday bookings to be close to pre COVID levels this year. All these stories and more are covered in this week’s insights update from BlackBee.
Last week saw a continuation of the hot inflation data we’ve seen around the world for the past year. In the US January inflation again beat economists’ expectations coming in at 7.5%, a forty-year high. This again led to another step up in government bond yields around the world as investors prepared themselves for interest rate increases from central banks over the next few months. In this respect the US Federal Reserve meeting in March is definitely one to watch with some investors now speculating we will see a 0.5% rate hike next month.
Meanwhile in the Euro zone the monetary policy plot thickens. Having apparently kicked down the door to rate hikes in 2022 last week, ECB President Christine Lagarde appeared to backtrack on this sentiment last week. In comments to the European Parliament she stated that there was no sign that a “measurable tightening” of policy was needed. The lack of clarity here on ECB guidance is unhelpful but in our view it tends to back up the assertion that if rate hikes happen over the next twelve months, they will much shallower compared to the pace of monetary tightening in the US and the UK.
On the inflation front, if the pace of price increases is to ease over the next year then energy markets will need to be front and centre of this moderation. Since the turn of the year oil prices have continued to grind higher as the supply response from major oil producers has been inadequate in the face of quickly climbing economically driven demand. However, there may be some signs that the supply picture could improve over the next few months. Our chart of the week this week shows the number of open US oil wells which is again closing in on pre COVID levels, suggesting that US oil output could climb back to pre-COVID highs of around 12 million barrels per day (mb/d) from current levels of approximately 11mb/d.
Despite another rise in government bond yields, equity markets showed a little more resilience and stability than of late with some gains visible across the globe. With around 70% of companies in the S&P 500 Index of US stocks having reported Q4 2021 earnings, profits have grown by approximately 26% with some of the biggest gains not surprisingly registered by sectors like materials and energy where price rises through 2021 have massively boosted revenues. The strong gains in Q4 2021 earnings is not translating into profit upgrades for the first half of 2022 however which is slightly disappointing. For example, Factset is reporting that profit growth in the first half of 2022 is forecast to slow to only approximately 5% which points to a slowing in the pace of gains this year, a factor we flagged in our recent 2022 outlook.
Last week was another tough one for bond investors given the increase in yields driven by further inflation concerns. Sovereign government bond yields pushed higher again with US 10-year bond yields breaking north of 2% for the first time since 2019. The various credit sectors also struggled against the headwind of rising yields and continued nervy undertones in risky assets more generally.
Oil prices remained elevated last week with the US Energy Information Administration (EIA) pointing to continued tightness in the global oil market. It spelt this out as it raised its forecast for global oil demand by 800,000 barrels per day last week, meaning that demand is now forecast to grow to an all-time high of over 100 million barrels per day. On the supply side the EIA also indicated that both Saudi Arabia and the UAE had considerable scope to increase supply which could help calm energy markets.
Hospitality & Travel – Further positives for the recovery in European travel and hospitality but inflation concerns loom
More positive updates on the hospitality and travel recovery arrived last week with the news that travel agent TUI expects bookings to be close to pre COVID levels in 2022. The removal of travel restrictions and testing requirements for travel has spurred the growth in bookings, with many consumers opting for more expensive and distant holiday destinations such as the Caribbean. The decision to avail of the more upmarket holiday packages speaks to the €1 trillion savings accumulated by Europeans over the pandemic as revealed by the IMF last week (equating to 8% of GDP). As with many other sectors however, inflation is having an impact with TUI noting that prices for summer holidays were up 22% in 2022 compared to the previous year. Given the scale of savings households accumulated during the pandemic, the impact of inflation doesn’t seem to be hurting demand thus far. However, going forward keeping cost inflation under control will be a key issue for the sector as it continues on its medium-term recovery path.
Commercial Real Estate – Strong Hibernia REIT performance a good pointer for Dublin office market
Last week Hibernia REIT released a trading performance update for the four months from October 1st highlighting their consistently strong performance in the Dublin office sector. Its rent collection rate of 99% for offices lead the sector, which averaged 91%, having also collected over 99% of residential rent which had an average occupancy of 99%. Aside from the specifics of Hibernia’s strong performance, we believe improving data on occupancy and rent collection very much validates the positive outlook for the Dublin office market. As flagged by both Lisney and CBRE in their 2022 outlook’s ESG will become an integral factor this year for investors and a means by which entities will differentiate themselves. Hibernia REIT received an A- in its 2021 CDP Climate Change Response, averaging an energy rating of B3 or better in over 90% of its portfolio.