US inflation data keeps equity and bond investors on tenterhooks, SCSI projects 5% increase for Irish house prices in 2022 and Third Project Woodland report roundly criticised for holding back progress for the forestry sector. All these stories and more are covered in this week’s insights update from BlackBee.
Following the unsettling December minutes from the Fed the previous week, the mood surrounding US monetary policy remained sombre last week thanks to the release of US December inflation which showed price gains hitting another new high. Headline US inflation hit 7%, the highest level since 1982 while core inflation (stripping out food and gas prices) also accelerated to 5.5%.
Not surprisingly the higher inflation readings were also accompanied by further ‘Fedspeak’ on US monetary policy. Pat Harker of the Philadelphia Fed said in a CNBC interview that he saw grounds for three rate hikes this year and up to four if inflation deteriorated. Chair Jay Powell also reiterated the need to tighten monetary policy this year during his Senate confirmation hearing although he also added that he felt inflation would ease this year, something which the bond market in particular took some solace from.
On the growth front we saw positive news for the most part last week. UK GDP data showed that the economy surpassed its pre COVID size in November, something which we expect to see more of across the global economy as we move through 2022. In addition, Chinese trade data showed that the economies trade surplus (exports minus imports) reached a record high at the end of 2021 which does suggest improved demand around the rest of the world. However, the news wasn’t all good. Q4 GDP data from Germany showed the economy there contracted in the final three months of the year even as it grew by 2.7% for the full year. Again a number of familiar factors held back the economy in Q4, namely supply chain issues and COVID restrictions which have been reintroduced on foot of the emergence of the omicron strain.
Last week was another tricky one for equity investors, especially those in the technology sector. Chatter about tighter monetary policy set off periodic sell offs across the sector and indeed this was very much a headwind for equities more generally in the week. In our 2022 outlook published last week we discussed the fact that tighter monetary policy is likely to mean that valuations (P/E ratios in equities’ case) are unlikely to expand further, meaning the burden of driving stock markets higher in 2022 is likely to fall on driving improvements in fundamentals. Our chart of the week shows that profit growth in the Q4 earnings season (which started last week) is likely to remain strong but tail off as the year progresses. It’s important that profit growth forecasts are met in 2022 if equities are to achieve the mid to high single digit increases we feel are achievable this year.
Last week was a slightly calmer one for bond markets compared to the opening trading week of the year. Sovereign yields softened a touch despite the higher than forecast inflation readings in the US with Chair Powell’s Senate testimony appearing to help sentiment. Meanwhile in the credit space performances were mixed, not a hugely surprising development given the choppiness in markets overall since investors returned from their Christmas break.
Generally commodities pushed higher last week with the weakness in the US dollar helping propel the complex higher. It was another good week for oil market news and the fundamental picture remains positive for prices with demand continuing to recover and the main oil producing countries taking only gradual steps to increase output. Growing demand and thus far constrained supply is another factor that helped copper in 2021 and it again pushed slightly higher last week.
Housing – SCSI forecasts price to increase by 5% in 2022
Last week the Society of Chartered Surveyors Ireland (SCSI) released its 2022 outlook for the residential property sector, forecasting a median increase in property values of 5%. The lack of existing homes and the number of new units being listed on the market was cited as being the primary driver, with the fall in construction of new homes as a result of lockdowns constraining supply. A 5% increase in prices is expected across Munster and Leinster (incl. Dublin), whereas prices are anticipated to rise by 7% in Ulster and Connaught where construction was disproportionately affected.
Agents reported significant demand from purchasers in both the new sales and second-hand markets although those in need of renovation proved less appealing. The strong demand and lack of supply in both sale and rental markets underpins the crucial role for the government’s ‘Housing for All’ plan, which includes the initiative to partly fund new apartments for sale; the increased use of compulsory purchase orders in obtaining vacant properties; the introduction of a shared equity scheme; and the regulatory review of the planning process. Overall, we expect prices to rise throughout the first half of 2022 before new housing stock can alleviate supply, and subsequently the price pressures.
Forestry – Third Project Woodland Report criticized for highlighting a lack of progress.
The Minister for State Pippa Hackett last week released the third interim report on the implementation of project woodland, which highlighted progress last year but also the distance to go to meet Ireland’s commitments to the sector. Overall, 4,035 licenses were issued this year – short of the department’s target of 4,500 licenses for the year. Of these 4,035 licenses however, only 12% of them were issued for afforestation meaning that it was no surprise that Ireland only met between 20-25% of its afforestation target in 2021, a fact that has been widely criticized by industry stakeholders.
The lack of licenses being issued also means that foresters whose crops require thinning or felling are unable to do so, reducing the ability of our forests to act as carbon sinks and increasing the risk of these forests becoming net emitters of carbon. The Cathaoirleach of the Oireachtas Agriculture Committee, Jackie Cahill also expressed his disappointment at the announcement that there would be further consultation on a new forestry strategy – “We need action, not talking, we need more licenses not consultations”, sentiments which are echoed across the industry as tensions around the lack of support for private foresters grow.