Weekly Market Insight

Weekly Market Insights – 16th May 

16th May 2022

Hotter than expected US inflation print leads to more equity market volatility, Lagarde gives clearest signal yet of an impending ECB interest rate increase and latest Daft.ie data shows that supply remains the biggest issue in the Irish housing market. All these stories and more are covered in this week’s insights update from BlackBee.

Global Economy

Hotter than expected April inflation prints set the tone for a nervous week across markets. Although US headline and core inflation readings were lower than in March, they came in ahead of investor expectations at 8.3% and 6.2% respectively which hardens the possibility that the US Federal Reserve will increase interest rates by 0.5% in June and July. With such rate hikes becoming more baked in, sentiment deteriorated further with both equities and government bonds selling off mid-week as investors worried that higher interest rates would drag the US economy down.

Although higher inflation and interest rates will slow US economic growth, we are still optimistic the economy there can achieve a soft landing. Consumer spending will be key to this scenario playing out – in this context we’d note that service sector Purchasing Manager Index (PMI) readings are still pointing to robust US growth. If these readings continue to hold up, then we’re confident the US economy can remain resilient in the face of higher interest rates and inflation.

Meanwhile in the Euro area, ECB President Christine Lagarde gave her clearest signal yet that Euro area interest rates could head higher over the summer months. In a speech last Wednesday, she said she expected bond purchases to end early in the third quarter and interest rates to increase some time after which “could mean a period of only a few weeks”. As we’ve noted previously, we’d question just how far down the rate hike road the ECB can go when the region is likely to suffer the severest economic fallout from the conflict in Ukraine.  

Equities

Last week was another difficult one for stock market investors with losses in many parts of the world that were only narrowed or reversed thanks to a big rally on Friday. Our chart of the week this week shows that many equity markets are on the edge of bear market status. Looking back at historic bear markets, this year’s losses (although painful!) are relatively modest. Whether equities suffer more from here or begin to recover in our view depends on whether slowing economic momentum turns into recession. At present we’re still in the recovery camp although lower oil prices and a sensible approach to tightening monetary policy would help in this regard. One plus for investors this year (compared to previous bear markets) is that company earnings are still forecast to grow in 2022. This picture differs from previous severe bear markets.

Bonds

Bond market performances varied over the course of last week. Weaker investor sentiment towards equities also hurt credit market performances with high yield and emerging market bonds suffering in particular. It was more of a ‘game of two halves’ for government bonds – sovereigns sold off initially in the week on the back of the hotter that expected inflation readings but recouped their losses as concerns around economic growth reasserted themselves later on.

Commodities

Commodities softened a little last week with two particular forces pushing down on prices. With greater risk aversion the US dollar strengthened again on foreign exchange markets given its safe haven status – this hit the precious metals in particular with gold and silver moving lower. In energy markets, oil traded lower as investors worried about the impact a weaker economy could have on crude demand.

Tourism & Hospitality –  Hostelworld highlights strong recovery across all market segments

Last week Hostelworld, the Dublin based bookings company, reported that revenues in the first 18 weeks of the year had rebounded to 97% and net bookings to 73% of 2019 levels. The level of net bookings across Europe, however, now stands at 100% or more for the summer, up from 80% six weeks ago. Long-haul bookings are now at 70% of pre-pandemic levels with bookings from the US and Canada into Europe having fully recovered. The strength of bookings data is also evident in the more luxurious Dublin hotel market, where last Thursday there were only 42 available rooms across the city centre. Overall, this adds further backing to our view that the hospitality and tourism sector is now in full recovery mode and this is likely to be further helped by the government’s decision this week to retain the 9% VAT rate until February 2023

Housing – Supply still the biggest issue stopping runaway inflation from slowing down

Last week Daft released its quarterly Irish rental report highlighting that the supply of rental accommodation is now at its lowest level since records began in 2006. There were just 851 rental homes listed on Daft as of May 1st this year, down 77% year on year, and is 10 times lower than the 15-year average of 9,200. As a result, market rents were up by 11.7% year on year. The stock of property for sale was also at its lowest level on record in March, another factor driving housing inflation rates. The low levels of stock for sale and rent again really underlines the need to increase supply in the market. Not alone is this a huge social challenge but also one which needs to be overcome if Ireland’s economic competitiveness is not to suffer.