US Fed Chair Powell channels his inner Paul Volker, European equities retrace all their Ukrainian losses and why forestry can ease fossil fuel price pressures on the Irish economy. All these stories and more are covered in this week’s insights update from BlackBee.
Last week’s eagerly awaited meeting of the US Federal Reserve was the clear main event of the week in respect of the global economy. On interest rates the only question was by how much the Fed would hike. On this point it erred on the side of caution with a hike of only 0.25%. However it continues to talk tough on the inflation outlook via its March ‘dot plot’ which indicated that the median expectation for interest rates by the end of the year was at 1.9% versus only 0.9% back in December. This combination of elevated inflation and hawkishness from the Fed continues to vex investors – this week’s chart of the week shows that both factors show prominently in the list of risks investors identified in the March edition of the Bank of America Merrill Lynch Investor survey.
As far as the bond market goes, it is currently signalling a similar tightening this year to the Fed’s own assessment. However, as we noted recently the yield curve in the US has flattened notably in the past few weeks which suggests a slowing trajectory for the US economy is more likely than not. If this does prove to be the case, it will be interesting to see if the Fed continues to tighten policy as aggressively through the second half of 2022 and into 2023.
The Fed wasn’t alone in hiking interest rates last week with the Bank of England also tightening for the third time this year. However, despite this and the continued events in the Ukraine investors enjoyed a better week than of late. The easing of the Vix index (also known as Wall Street’s ‘fear gauge’) seemed to suggest investors had become somewhat more relaxed about the various economic and geopolitical risks.
Equity markets rallied hard last week as concerns around the war in Ukraine appeared to ease, mainly on foot of suggestions that Moscow and Kiyv could be edging towards a tentative peace agreement. This sentiment drove European equities higher in particular, with indices in the region retracing all their losses since the invasion began. Investors also seemed to take confidence from comments from China’s top economic adviser Liu He that his government would take steps to support the economy in the short term. This was clearly visible in sharp increases in Asian equities with Hong Kong’s Hang Seng index having its best day since 2008 last week.
Sovereign bond yields continued to push higher last week on foot of the latest inflation data and moves by central banks. The relief rally in risk assets was also a headwind for government bonds and all together this kept bond indices under pressure for the most part. Performances were slightly stronger in credit markets with emerging market bonds enjoying something of a rebound following a bruising few weeks in the midst of the Ukrainian invasion.
The significant volatility across commodity markets continued last week but was centred primarily around oil prices. Oil prices had a topsy turvy week with prices initially falling sharply on investor concerns that higher prices were hitting Chinese demand, a factor that was validated by the International Energy Agency’s (IEA) near one million barrel per day downgrade to its 2022 global demand forecast which was announced midweek. However, prices regained some poise with both the IEA and the US Energy Information Administration (EIA) slashing their forecasts for 2022 Russian oil supply by 3 million and 0.75 million barrels per day respectively – a massive negative for global supply.
Forestry – High fossil fuel costs present another opportunity for forestry, but licensing logjam continues to impede sector
As fossil fuel prices surge globally so too do the costs of fertilizer, food, and heating, sparking greater calls from households to businesses and even government to seek alternative fuel sources, mirroring countries like Denmark, Austria, and Sweden who have made large strides in the transition toward renewable energy. Ireland has a unique opportunity to follow in these countries’ footsteps by switching to timber-based fuel sources as Irish woodland grows three times faster than in Nordic countries.
According to the Irish BioEnergy association (IrBEA) we will produce two million cubic meters of timber annually by 2035, equating to 7.8% of Ireland’s heating bill and cutting fuel costs for commercial operators by 60% based on current prices. It would also provide jobs for the local economy in the areas of forest management, harvesting, haulage, and maintenance.
The Support Scheme for Renewable Heat (SSRH) also provides an ideal opportunity for non-domestic heat users to transition from fossil fuels to biomass systems, but uptake is slow outside of agricultural facilities due to a lack of promotion and advertising, even though hotels, care-homes, and leisure centres are ideally placed to benefit, especially in the wake of the hardships they felt during the pandemic. To make this transition however, we need a more consistent supply of timber. Yet the rate at which forestry licences are being issued is still far too low, with recent data indicating Ireland will only reach 60% of our yearly target by the end of 2022. This lack of progress remains a key hurdle to the future success of the sector, particularly since the opportunities and benefits accruing from the sector are so apparent.