The US yield curve points to a slowing economy as the Fed prepares for interest rate lift off, geopolitical issues with Russia and the Ukraine create further market volatility and a record year for investment in industrial/logistics real estate as stock levels dwindle. All these stories and more are covered in this week’s insights update from BlackBee.
The minutes from the US Federal Reserve’s January meeting were the main economic event for investors last week. As expected, they appeared to confirm that a first interest rate increase was likely in March while also acknowledging that a faster pace of monetary tightening might be needed if inflation does not abate. Fairly hawkish all round then. However it didn’t have the same impact on bond markets as the previous set of minutes which sparked the beginning of the bond market selloff.
In fact US bond yields slipped on foot of the minutes which suggests to us that investors are slightly better conditioned now to the prospect of rate rises this year. Interestingly our chart of the week this week indicates that the US yield curve (the graph of bond yields plotted against their maturity) has flattened since the talk of US interest rate increases began to grow louder. A flattening yield curve has historically been a good predictor of slowing US growth and even recession.
Does this mean the US is headed for recession? We don’t think so. However it does suggest growth may slow as interest rate hikes accumulate this year which in turn may change the path of the US tightening cycle in 2023 and beyond. Therefore, as we’ve cautioned in previous updates, the path for US interest rates into next year and beyond will very much be dependent on what the prevailing economic picture looks like then. So we believe it’s premature for investors to automatically assume US interest rates will continue to rise for the next 2-3 years. Unfortunately for investors, economic cycles are rarely as smooth or predictable as that.
Stock markets endured another choppy week last week although at least this time the Fed couldn’t be held responsible! US equities actually responded positively to the release of the Fed minutes for its January meeting with concerns easing around the prospect of a 0.5% interest rate increase next month. Instead geopolitical uncertainty about the prospect of conflict between the Ukraine and Russia led to something of a see saw week for equity markets. On the earnings front the news remained broadly positive with overall S&P 500 earnings up 27% year on year as the Q4 earnings season draws to a close although investors’ attention is quickly turning to future earnings to drive stock markets higher.
The backdrop for bond markets was slightly better last week although the asset class still struggled to make much headway. Although last week’s Fed minutes got a warmer reception from bond investors compared to previously, the prospect of consistent US interest rate increases this year is for the moment holding back government bond markets from making notable gains, even with geopolitical concerns rising around Russia and the Ukraine. Geopolitics similarly held back credit markets last week as investors continue to assess the next steps in Eastern Europe.
As has been the case in recent weeks, commodity markets provided some respite for investors from losses in other asset classes. Rising risk aversion arising from geopolitical uncertainty meant bids for both oil prices and precious metals remained strong although the former was slightly down on the week. Such has been the rise in oil prices in recent months that President Biden is reportedly considering cutting federal taxes on US petrol prices which have risen by almost 50% (to around $3.50 per gallon) on his watch.
Travel & Hospitality – Flight schedules and bookings data increasingly indicative of strong rebound
Over the last few updates we have reported increasingly positive news for the European travel and hospitality sectors; strong bookings data from the World Tourism & Travel Council and TUI, easing travel restrictions, positive Irish Hotel performance as seen through the improvement in RevPAR, and increasingly busy summer flight schedules from both Ryanair and Aer Lingus. And now, a month after announcing their busiest summer schedule from Dublin, Eddie Wilson, CEO of Ryanair DAC also announced that an additional aircraft will be based in Cork to operate 7 new routes this summer to Pisa (Italy), Alghero (Sardinia, Italy), and Valencia (Spain), as well as Manchester, Birmingham, and Edinburgh (UK). The move will increase the number of Ryanair flights to 120 per week, and represents a further €100m investment in Cork Airport, who’s Managing Director, Niall McCarthy, expects passenger traffic to rise by 750% over 2021, reflecting the large pent-up demand for travel. This announcement by Ryanair in conjunction with positive bookings data only galvanises our belief that a strong recovery for travel and hospitality is on the horizon.
Commercial Real Estate – Record year for investment in Industrial and Logistics despite take-up falling 31%
It was a record year for industrial and logistics assets with investment volumes in excess of €1 Billion and €550m worth of transactions taking place in the fourth quarter as restrictions eased and the construction of new premises were finalized. However, a growing scarcity of Grade A facilities was the key factor behind this record level of investment but also another statistic – that take-up fell by 31% compared with 2020. According to Savills leases of new stock accounted for 48% of annual take-up despite this representing only 1% of total stock available. Due to the lack of availability of stock built in the 2010s occupiers must now choose between looking for new developments or getting stuck with poor quality stock. JLL and Savills both report that the popularity of e-commerce will make the industrial and logistics sector the fastest growing sub-sector in 2022, with the e-commerce share of total EMEA logistics take-up potentially reaching 30%. Completed developments in the sector are anticipated to reach 2.2 million square feet in 2022, a record amount, however, over two thirds has already been committed, indicating that further investment to fund new developments is still required to meet prevailing demand.