Central bank meetings pointing to a growing monetary policy divergence, equities and bonds both whipsawed by macro uncertainty and further positive signs for the Irish tourism and hospitality sector. All these stories and more are covered in this week’s insights update from BlackBee.
Last week’s US Federal Reserve and Bank of England meetings were the main economic events for investors to chew over. The 0.5% increase in US interest rates was widely expected and Chair Powell also prepared investors for further 50 basis point hikes at upcoming meetings, a scenario investors have quickly become accustomed to this year. However, notably he ruled out being more aggressive than this. In addition, the Fed outlined a strategy for phasing out reinvestment of any maturing bonds it purchased as part of its most recent bond buying activity. Crucially, the strategy did not imply outright sales of bond holdings from within its bloated portfolio (on top of not reinvesting proceeds of maturing bonds) which could help ease some investor anxiety around the Fed’s policy tightening.
The Bank of England also increased interest rates last week by 0.25% to 1%, the highest since 2009 (see this week’s Chart of the week). However, in contrast to the Fed the Bank signalled the risk of an economic slowdown. This was reflected in the Bank’s guidance that “Some degree of further monetary tightening might still be appropriate in the coming months.”, a statement that to us could open the door to the Bank pausing later in the year particularly if economic momentum continues to slow. The fact that two committee members disagreed with that guidance in our view also supports this possibility.
What should investors take out of last week’s events? Well the scope for monetary policy divergence is growing – the US Fed is likely to continue to hike interest rates but the case for the Bank of England to do so is now growing less clear-cut. We think there are parallels here with the ECB – while it has signalled the possibility of interest rate increases in 2022, one would have to question how far down this road it can go particularly considering the Euro area will feel most economic fallout from the Ukrainian war. For investors slowing economic growth is a negative but if it results in less central bank hawkishness as we move through 2022 could it be seen as a stabilising factor for markets? It’s an intriguing possibility.
Equity investors endured another tough week with sentiment oscillating wildly between relief and anxiety. Fed Chair Powell’s comments after the Bank’s monetary policy decision on Wednesday prompted a sharp rally but this didn’t last as concerns about weaker economic growth and continued elevated inflation caused the mood to darken once again. On the earnings front the first quarter is drawing to a close but it has proved to be a positive one, even if its impact has been drowned out by more recent macro events. For the quarter earnings rose 7.1% (with around 85% of US S&P 500 companies having reported), an improvement compared to the 4.7% growth expected at the start of the reporting season.
Bond markets suffered similar ups and downs to many other markets last week. As with equities, government bonds initially enjoyed a relief rally on the back of the comments from the Fed. But this was short-lived as concerns around inflation again lingered, leading sovereign yields to head higher again even as fears around global economic growth intensify.
Commodities were again something of a safe haven last week although much of the positivity centred around the energy sector which was higher mainly as a result of the EU’s decision to gradually phase out crude and refined product imports from Russia by the end of the year. Although this is undoubtedly news that should keep energy prices on the front foot, oil price moves were modest enough – held back by ongoing nervousness around how COVID lockdowns in China could crimp oil demand. Elsewhere metals had a more mixed time of it with a strengthening US dollar holding them back.
Tourism & Hospitality – Tourism indicators flash green
A few weeks ago, we reported that data from the STR indicated that RevPAR (revenue per available room) exceeded pre-pandemic levels for provincial hotels over the first quarter of the year, a sign of excellent progress for the sector. Now other indicators for the industry are flashing green. Last week the CSO released their monthly travel statistics for March indicating over 1.1 million passengers arrived on our shores and 1.05 million departed, the first time since the pandemic began that passenger numbers in or out exceeded one million. These figures are up roughly 40% from February and represent 75% of March 2019 levels.
Increased passenger activity has been a feature throughout Europe for the past two months, despite geopolitical uncertainty and inflationary headwinds. For example, Ryanair flew 14.24 million passengers in April, up from 13.5 million in April 2019. This helped Ryanair achieve an average flight occupancy of 91% for the past month, with 80% generally being accepted to be the industry profit threshold. They aren’t the only airline reaping the benefits – IAG, Aer Lingus’s parent company and owner of British Airways have forward bookings of 90% of pre COVID levels for the summer. Air France-KLM, Lufthansa, also expect a busy summer schedule returning first quarter profits, beating their own earnings estimates. All in all, the signs look good for the tourism and hospitality sector.