Weekly Market Insight

Weekly Market Insights – 19th April

19th April 2022

Fedspeak remains hawkish despite early evidence inflation may be peaking, bond markets under pressure again and Ireland remains well off the forest planting levels required to meet its climate targets. All these stories and more are covered in this week’s insights update from BlackBee.

Economy

Investors were gripped by the release of the March inflation figures in the US and UK this week with consumer prices indices rising to 8.5% and 7% on an annual basis, their highest readings since 1981 and 1992 respectively, with roughly half the inflationary pressures accounted for by the surge in energy prices. In the US some investors believe inflation has peaked as core inflation rose less than expected and used car prices, analysts’ canary in the coal mine for inflation, fell by 3.8%. US retail sales, excluding the swell of gasoline receipts, fell by 0.3%, suggesting that consumers were cutting back on nonessential spending. The Fed however, won’t be swayed even if inflation has peaked with Fed members Brainard, Waller, and Williams all signaling that a half-percentage rate hike next month may be appropriate, citing an extremely tight labor market given that 431,000 new jobs were added to the economy in March, the 11th straight month of 400,000 new jobs being registered. The hawkish message from the Fed and dampened consumer spending saw bond investors selling again, driving yields higher.

In Europe the ECB outlined its expectation of ending net asset purchases in the third quarter and suggested gradual rate hikes may sometime after. The ECB’s dovish decision surprised some investors and caused the dollar to appreciate against the Euro as the gap between US and Euro bond yields widened (see our chart of the week). Oil, having declined over the last few weeks due to China’s shutdown, rallied as the EU signaled it may introduce a phased ban on Russian energy imports, underlining current global price pressures.

Equities

US equity markets declined again last week, the S&P 500 and NASDAQ tumbled early on as investors contemplated the Labor Department’s impending inflationary announcement, the potential impact of tightening monetary policy, and the beginning of earnings season. The hotter than expected inflation announcement led traders to believe inflation had peaked driving a morning rally Tuesday before Oil reached $100 a barrel, reigniting inflation worries. Taking their cue from bond traders later in the week US markets seesawed up on the back of the decline in two-year Treasury yields and down again as hawkish comments from fed officials fueled further speculation of aggressive rate hikes. In Europe markets clawed back early losses on the back of dovish comments from the ECB and stronger than expected earnings reports, defensive sectors performed well due to the fears over the outlook for growth.

Bonds

Yields climbed early in the week as bond traders dialled back their expectations of Fed policy tightening as evidence emerged that core inflationary pressures may dwindle. That positivity was short-lived as US import prices were higher than anticipated and Fed officials reiterated their hawkish views. The spread between the two-year Treasury yield and 10-year yield extended to 18 basis points during the week easing recessionary worries. European yields eased on the back of Lagarde’s dovish comments.

Commodities

Oil rallied this week on the belief that the EU is planning to introduce a phased embargo on Russian imports after easing the past few weeks following the release of strategic reserves and the Covid shutdown in China. Despite being under pressure from the strengthening dollar and the bond market selloff after the latest retail sales report (indicated consumers were prioritising essentials), gold finished the week higher as investors sought safe haven assets amid soaring inflation and the war in Ukraine. Bullion-backed ETFs had inflows of over 14 tons on Wednesday, the greatest in over five weeks, highlighting the demand for safe haven assets.

Sector News:

Forestry – Department of Agriculture underestimates the severity of licensing crisis

Last week the Minister for State, Pippa Hackett announced that “consistent negative messaging” was undermining the forestry sector and that in 20 years we will look back at the reduced planting rate as a “blip we have moved on from”. The announcement was a rebuttal to Paddy Bruton’s (SEEFA President) latest comments in which he described the Department’s management team as “inept and remaining incapable”, citing the decline in yearly planting from 15,000 hectares (ha) per annum 20 years ago, to 8,000 a decade ago, with only 2,000ha being planted last year. Hackett’s statement proved slightly ironic following the release of a report from COFORD (Council for Forest Research and Development), the department’s own research group, that 16,000ha per year was required to be planted to reach our climate targets, casting further doubt over the Departments ability to meet its own objectives and providing support for Bruton’s argument. Especially as there has been no indication the Department will adopt their own research departments recommendations or targets and are yet to comment on the reports’ findings.