Bank of England the first of the big central banks to increase interest rates, equity and bond markets openly sceptical of the Fed’s plans for tightening monetary policy and changes to afforestation licensing needs to be the beginning of more radical reform. All these stories and more are covered in this week’s insights update from BlackBee.
The last full week of 2021’s trading year was a bumper one from an economic standpoint with monetary policy meetings at the US Fed, ECB, Bank of England and Bank of Japan. The key message emerging from the majority of the meetings is that monetary policy is set to tighten (albeit to varying degrees) in 2022. The clearest signal on this front came from the US Fed as Chair Jay Powell unveiled an accelerated taper of bond purchases (now due to be completed by March) and a fresh ‘Dot plot’ which indicated the central bank could increase interest rates three times next year. Perversely equities and bonds rallied on the back of the announcement. Our chart of the week this week shows that US interest rate expectations barely moved suggesting investors just don’t believe the Fed’s latest guidance.
Elsewhere the Bank of England also moved onto the front foot by announcing its first interest rate increase since 2018 in response to inflation which climbed again to 5.1% in November. Elsewhere moves at the Bank of Japan and ECB were more nuanced. The Bank of Japan announced it would scale back corporate bond purchases while still committing to the current low levels of interest rates and bond yields. The most dovish statement came from the ECB which announced it would modestly reduce asset purchases and again committed to no interest rate increases in 2022, an outlook which we agree with.
Outside of monetary policy meetings the other economic news of note was the provisional PMI readings for December which generally showed still robust manufacturing activity globally but slowing service sector activity as COVID 19 restrictions impacted. In domestic circles the CSO published data last week showing year on year changes in house prices still accelerating at 13.5% in October, the highest rate of annual house price inflation in six years.
Somewhat perversely the equity market rallied following the Fed’s publication of its December ‘Dot plot’ and plan to accelerate its bond taper although for the week as a whole equities were lower. This sets up an interesting dynamic for early 2022 – who’s assessment of monetary policy is correct, the Fed’s or the equity and bond markets’? Historically stock market P/Es tend to come under pressure as interest rates rise so if the Fed is as aggressive as its latest dots suggest, the equity market will be much more dependent on profit growth as a driver of returns in 2022. As we move into 2022 stock markets are forecast to grow profits by 7% next year compared to the growth of over 50% we saw in 2021.
As we noted in the Global Economy section bond markets barely budged last week in response to central bank guidance which could only be interpreted as hawkish and inflation rates that remain stubbornly high. Interestingly the US Fed dropped the word ‘transitory’ from its statements about inflation, suggesting that central bankers’ views are transitioning towards the realisation that inflation is going to be ‘higher for longer’. With monetary policy looking likely to tighten in 2022 via less Quantitative Easing and/or interest rate increases, this is likely to present a headwind for both government bonds and credit.
Commodities were largely unchanged over the course of last week. Oil prices moved slightly lower on the back of softer sentiment as a result of the potential negative impact omicron could have on short term demand. In contrast precious metals were a little firmer, helped by the lack of reaction from bond markets to the various monetary policy meetings during the week.
Hospitality – Tourism Ireland Launches Wild Atlantic Way Promotion in The Netherlands.
Last week Tourism Ireland announced a new campaign to promote the Wild Atlantic Way to potential Dutch holidaymakers via Cork. The campaign, which will run between now and the 6th of January, will be advertised in all tram-stations on digital billboards and on the sides of all trams using the tagline “Vlieg naar Cork en ontdek de Wild Atlantic Way”, meaning “Fly to Cork and discover the Wild Atlantic Way”. The promotion will be seen an estimated 2 million times between now and January and highlights the ease at which you can fly from Amsterdam to Cork. This is one of a number of campaigns launched recently by Tourism Ireland as they seek to drive the recovery in the Irish hospitality and tourism sectors in 2022 which have seen Christmas trading impacted for a second year running by a new Covid variant (Omicron).
Forestry – Afforestation licensing requirements removed for areas up to 1ha.
Pippa Hackett, the Minister for State announced last week that the requirement for an afforestation license would no longer apply to those wishing the plant up to one hectare of woodland and would allow increased planting of small areas of woodland at wetlands adjacent to rivers and streams. The plan is hoped to enable the Department of Agriculture to increase native tree planting to meet our climate targets and reduce the current licensing backlog by removing applications for small projects from the system. The move will be welcomed by the sector which has been severely constrained by the licensing backlog over the last few years. Much more will have to be done however, if we wish to meet our planting and climate targets that we are currently well behind.