The Fed green lights its COVID monetary policy unwind, still $11 Trillion of negative yielding bonds sloshing about even after the sell off and massive spike in 2022 holiday bookings again points to better times ahead for the hospitality sector. All these stories and more are covered in this week’s insights update from BlackBee.
Last week saw the most eagerly awaited US Fed monetary policy meeting since the dark days of 2020 when the COVID 19 pandemic was washing over the globe. Fed President Jay Powell indicated that interest rate hikes were very much on the way, with interest rate expectations quickly adjusting to assume four rate hikes this year beginning in March. This hawkishness compounded the headaches investors have suffered since the start of the year, leading to another bout of weakness in many asset classes.
From an economic viewpoint, is such a move from the Fed warranted? Absolutely! From a growth perspective the US economy expanded by 5.7% in 2021, the fastest pace of growth since 1984. In turn growth (although facing challenges from omicron and inflation/supply chain issues) is still forecast to be well above long term potential in 2022 as the economy continues its recovery. From the inflation angle headline inflation is running at 7%. So, based on both growth and inflation mandates the US economy is running hot and consequently it is appropriate to begin to withdraw monetary stimulus.
Markets are under pressure now as a result of perceived hawkishness about US interest rates. In our view the pervasive bearishness now that the US is continuously going to hike rates in the next two years may be as misguided as last year’s notion (which pushed equity markets ever higher) that loose monetary policy is here forever! Most often the truth ends up somewhere in the middle and this aligns with our view that yes US interest rates will go up in 2022 for sure but further moves beyond this will very much be data dependent. In our recent Outlook 2022 one of our key messages was that higher interest rates would be more of a sticking point for markets than for the economy – an observation that is rapidly ringing true. However, in our view investors shouldn’t forget about the continuing economic recovery and the scope that it still has to propel risk asset classes forward over the long term.
Last week was another tough one for equity markets with US stocks moving into correction territory and the technology sector bearing the brunt of the fresh wave of selling. The Q4 2021 corporate earnings season is still going well, something which has almost been completely disregarded amidst the constant recent commentary around US monetary policy. With around a quarter of the S&P 500 stock market having reported, Q1 profits are running around 25% higher than a year ago and slightly ahead of the strong expectations amongst investors at the start of the reporting season. As our comment above suggests, improvements in fundamentals are very much the bedrock on which further stock market progress has to be built in 2022. But so far at least companies are off to a good start on this front.
Despite the further volatility in risk assets, the bond space wasn’t exactly a safe haven either last week which underlines just how highly correlated equities and bonds have become in the last number of years. Sovereign yields stayed on the front foot but didn’t move materially higher which at least put a floor under losses for the week. Our chart of the week this week though shows one interesting corollary of the bond market selloff of the last few weeks – that is that the amount of bonds globally that have negative yields has fallen sharply as yields have risen. For long term bond investors buying now this is better news although future long term returns from government bonds are still likely to be far below what investors have grown accustomed to since 2000.
Another effect of the US Fed’s perceived hawkishness last week was that the US dollar strengthened significantly, something which other central banks may want to factor into their own thinking if they are considering embarking on similar tightening paths. This US dollar strength sapped the commodity sector and the precious metals (gold and silver) in particular. Meanwhile energy prices remained well supported thanks to the tight supply and demand picture as well as geopolitical concerns surrounding Russia and the Ukraine.
Hospitality – Holiday booking data indicates massive uptick versus 2021
In last week’s weekly, we commented that the stars were beginning to align for tourism and hospitality and the latest figures from the World Travel & Tourism Council further backs this up. Last week it reported that intra-European travel In last week’s weekly, we commented that the stars were beginning to align for tourism and hospitality and the latest figures from the World Travel & Tourism Council further backs this up. Last week it reported that intra-European travel bookings for easter and summer 2022 had increased by 250% and 80% over 2021, respectively. Despite the significant increase in bookings, numbers are still well below pre-pandemic levels. However, with better news of late on omicron (greater transmissibility but fewer incidences of hospitalization and death) the risk of widespread restrictions appears to be receding. We believe this should boost consumer sentiment and potentially underpin further recovery in holiday booking data. Again, all-in-all data like this for 2022 indicates better times are returning for the tourism, travel, and hospitality sectors.
Commercial Real Estate – Outlooks from Lisney and CBRE point towards a possible two paced recovery and emphasis on ESG credentials
Last week CBRE released its Commercial Real-Estate outlook for 2022. In its view, market indicators such as investment turnover, sales activity and leasing volumes indicate that the recovery in commercial real estate is well underway. There are still market concerns surrounding supply bottlenecks, inflationary pressures on materials, rising prices, and pandemic uncertainty. However, in its view strong occupier and investment demand coupled with easing restrictions and still low interest rates (which investor and consumers may wish to lock in given the wider international picture) should support confidence in the industry. It did note though that the recovery in Ireland may be slightly two paced with the yield spread between primary and secondary assets expected to widen, something which could be compounded by differing ESG credentials between stock in primary and secondary markets. ESG factors were also flagged by Lisney in its 2022 outlook. In its view sustainability is becoming an integral factor, especially now that the EU Taxonomy legislation has come into force which classifies the environmental sustainability of the construction, renovation, and the acquisition and ownership of real estate, something entities will seek to differentiate themselves by.