IMF warns policymakers should be “very, very vigilant” with signs of higher inflation everywhere, Q3 earnings help stock markets pick themselves up off the canvas and Budget 2022 package of €4.7 Billion should help reinforce the Irish economic recovery. All these stories and more are covered in this week’s insights update from BlackBee.
One of the biggest investor themes of the year, inflation, continued to simmer last week with plenty of evidence that it’s not going lower just yet! In the US the September inflation rate came in at 5.4% (a 13-year high) and was slightly higher than economists’ expectations. The Irish inflation rate also hit a 13 year high in September, hitting 3.7% while Chinese factory prices (crucial as China is the centre of global manufacturing) were up a whopping 10.7% year on year in September, the highest since 1995. With all of this data, continued rises in energy prices and frequent news headlines about global supply chain logjams, little wonder the IMF warned last week that inflation risks are “skewed to the upside” and that monetary policymakers should be “very, very vigilant”.
The ongoing recovery in the world economy coupled with stubborn inflation pressures should give central banks more ammunition to begin to reverse their COVID 19 emergency monetary policies in 2022. The US Fed as is often the case is going to be the first ‘out of the traps’ here. The minutes of its September monetary policy meeting, published last week, showed that plans for this reversal were hardening and are now likely to begin as early as next month with a reduction in its Quantitative Easing (aka bond buying) programme.
Here at home the main economic focus was on Budget 2022 where an overall package of €4.7 Billion was unveiled evenly spread across all parts of society. In general, the budget spend was a little stronger than expected prior to the event, largely as a result of stronger than expected recent government revenue receipts. This should help support the recovery across the domestic economy over the next 12 months, boosting spending, investment and employment.
Equity markets were a little calmer than late last week, despite inflation still being a hot topic across the global economy. For the next few weeks, the Q3 earnings season will be the centre of attention for stock market investors. The early data so far has been strong, particularly from the banking sector, and this helped propel stock market indices higher in the week. Our chart of the week this week shows that Q3 stock market profits are again forecast to grow significantly although the growth does look set to taper down as we move into 2022. As a result, we believe that it is crucial that earnings growth expectations for next year are delivered upon if stock markets are to build on this year’s progress.
Global bond markets managed to recover some ground last week following a rough last few weeks where yields rose and bond prices consequently fell. Government bonds made modest gains in the week with rising concerns about slowing economic growth around the world trumping stubborn inflation rates as the key driver of bond market direction. Conditions were also a little stronger in the corporate bond space, following the cue from equity markets. To this end corporate bond investors will also closely monitor the earnings season for reassurance around the ability of corporate borrowers to repay their debts.
Commodities again marched higher last week with good strength seen across all the major sectors even as the US dollar climbed. Oil surged past $80 dollars per barrel helped by comments from the International Energy Agency that the shortages in natural gas in Asia and Europe were in turn boosting consumption of oil and could add to oil demand to the tune of around 500,000 barrels per day over the next six months. Copper prices also surged last week – despite economic activity softening over the past few months it appears that investors believe growing supply chain issues around the world mean that copper demand will stay elevated over the next few months.
Real Estate – House prices make further gains in August
The Consumer Price Index (CPI) we noted in the economics section wasn’t the only evidence of rising prices published last week. The CSO also published its monthly data on Irish house prices showing that national prices rose by a significant 2.2% in the month and by 10.9% over the past year. In our recent report on the Irish housing market we projected that prices could continue to climb over the next couple of years helped by a recovering economy, strengthening lending impulse and tight supply picture. However, we do expect rates over price inflation to ease over the next few months. Recently we have seen some initial evidence that the supply of housing stock on the market may have hit an inflection point and may now slowly start to climb again. This in conjunction with rising levels of housing completions in the next year should soften the rates of house price appreciation.
Hospitality – Budget 2022 offers support for recovery, but stops short of retaining 9% VAT rate
Last weeks Budget was notable in regard to some supports offered to the hotel sector to help with its post COVID recovery. The extension of employment supports and the rates waiver scheme were welcome as was a package of expenditure targeted at the wider tourism, culture and arts sector – this included €39m in enhanced tourism marketing and product development, €90 million to rebuild air connectivity and €50m in business continuity supports. However, the 9% VAT rate on tourism was not retained. This was a disappointment for the sector, particularly for those business more exposed to business and international travel which have experienced a slower start to their recoveries since the economy reopened in May.
Forestry – Carbon ownership issue heats up
A couple of weeks ago we noted the comments from Minister for Agriculture Charlie McConalogue to the effect that farmers that planted forests and took advantage of state funding did not own the carbon credits which might accrue from these forests. As we expected this led to a heated response from farmers that signed forestry contracts without any mention of the ownership of carbon at the time. The Minister clarified his recent comments somewhat last week, adding that “the State is not trading or seeking to trade the carbon sequestered in farmers’ forests”. Although this clarification is helpful, what is needed in our view is complete clarity on ownership. Without this, farmers may be reluctant to plant further forestry on the land which would be a blow to the government’s planting target of 8,000 hectares per annum.