Let’s lose the tints

Henry Adams

Chief Product Officer
Wednesday, Feb, 15, 2023
5mins

Not to wish one’s life away, but there are good reasons I am sure we can all come up with having now dealt with January. From a markets and macro standpoint, data now starts rolling in, helpful in forming a view of how 2022 really was and what might shape the months to come. We have now been in this long enough to see that “risk on” has returned in style, as is often tradition, cash on the sidelines hitting stock markets in size. The big outperformers thus far? Italy (FTSE MIB) and the mighty NASDAQ have come back in vogue with a solid 16%+ and roughly 14% rise respectively thus far. Having tanked 35%ish last year, there is arguably some way for the NASDAQ to go for those sitting on tech right now.

It would be natural to think this newfound optimism stems from a bounce back in demand from businesses and consumers, powering forward earnings potential aiming once again for the moon and beyond. The reality, though, is in January alone 60,000 jobs have been shed due to restructuring, streamlining and the end of exuberance. Everyone from Microsoft to Dropbox has been at it – a necessary evil, but now apparently also a reason to buy. Is this a case of stretched optimism? If anything, one might expect the author to be biased towards tech, important I believe in looking at the facts and displaying them as fairly as one can. Fine to have an opinion too. Personally, I’d rather put new money to work in companies that are ambitious and pushing on, rather than retreating. Perhaps I should stick to debt markets… Below are the main equity indices on Valentine’s Day. My love of Italy is no secret, good to see the market sharing this sentiment!

Courtesy of Bloomberg LLP

The IMF is many things and continuing to be fairly pessimistic on the UK certainly seems to be a favorite pastime. One should heed their warnings though and follow their necessary actions. Since the beginning of the year, three heavily indebted nations (Egypt, Pakistan and Lebanon) have already been forced to devalue their currencies and receive bailouts. This figure doubles when considering urgent requirements from Argentina, Bangladesh and Nigeria. It is likely only the beginning, however I shall save such analysis for a later edition where no doubt the theme of Sovereign downgrades, defaults and solvency will be scrutinised.

Preliminary data out of the continent over the last couple of days has not been bad at all. The Eurozone remains firmly in growth territory despite having ratcheted up rates from -0.50% in mid-July ’22 to 2.50% just a couple of weeks ago. Talk is now of continued hikes to a terminal rate of 3.50%, with timing to be somewhere in the midst of summer holidays in the Northern Hemisphere. Looks like more rate curves than tan lines… again. The good news of course is that putting cash to work makes a lot of sense and is not to be discounted in both uncertain and potentially recessionary times, all whilst the central bank looks to simultaneously reduce the behemoth balance sheet amassed over the past quarters and, frankly, years. There is also no harm in locking in return for term, in my view. The wounds of low and negative rates still sore for so many.

The United Kingdom. Employment data as per Tuesday’s releases looks good. Reasons to be cheerful? Jobless claims down. Participation rate up. Unemployment flat (although, due to rounding, down just a touch). Earnings up. All of this is double-edged. The hardest thing to take for such an economy uniquely positioned with a tight labour force and no obvious means of increasing supply, is (bar bribing folks out of retirement/inactivity) odds of a second round of inflation continue to look high.

Now, the good news is that the economy has not yet fallen into recession as per last week’s annualized 0.4% expansion. Negative real wages should hopefully put a bit of a dampener on people getting too fancy, which right now is a good thing. According to some ONS measures even productivity was higher, which would justify an inflation-adjusted, real increase in wages (not a subversive attempt by the author to increase take home pay). Inflation (specifically the Consumer Price Index, CPI) has remained in double-digit territory at a still whopping 10.1%. OK, it is a six-month low, but my goodness it should never have reached double-digits and certainly should not remain there. Whilst petrol prices and accommodation fell sharply, alcohol and tobacco more than made up for it. If ever there were a reason to quit…on the other hand though…Talk of money market traders turning slightly dovish due to a lower than expected inflation print does make me wonder what they have been smoking, in what quantity, and whether it too is captured in this basket of goods, or perhaps it was imported?

 

(Where CPIH includes owner occupiers’ housing costs).   Office for National Statistics

One final point I do not see discussed of late, entirely possible of course that I am missing something here…But.  As a net importer of goods (and some services) should the Bank of England be more concerned about relative interest rates and the impact on the strength of GBP? Homemade price rises are quite sufficient thank you, surely we don’t need to import that as well?!

Strong employment data and rising wages is not just a UK phenomenon, coupled with a consumer-driven economy where consumer spending is rising, the US is increasingly looking like skirting even a single quarter of negative growth. The latest (and well-regarded) data from Bank of America showed debit and credit card spending increased 5.1% year-on-year. Their analysts acknowledged the impact of OMNICRON, stripped out though it was clear both higher wages and social security had a measurable impact. The question of course remains, how much is truly additional spending or simply keeping up with price rises, maintaining lifestyles. Luxury items did do well, implying a degree of comfort and faith in the strength of the economy and personal circumstance.

 

It is no surprise then that the latest voting members of the Federal Reserve have a Hawkish tone, advocating for rates through 5% and needing to keep an open mind about going yet higher. At some point though loans will soar, the positive is that it should at least be somewhat isolated and less systemically risky than last time around. Having been on the pitch at the time my view is fairly well known, which is that it pays to be conservative in particular with the lifeblood that is liquidity.

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