In April, Japanese inflation exceeded the Bank of Japan’s longstanding target of 2%, in a sign that more companies are passing on rising import costs to consumers. In a break with the other main central banks, the BoJ looks ready to maintain its ultra-loose monetary policy and keep interest rates at rock bottom for now.
It has been a tough year for Swiss property funds. They have been losing ground since April and are down 10% so far this year. This is a result of rising yields on Swiss government bonds, which again offer an alternative source of positive returns.
The surge in UK inflation (+9% YoY in April) continues to weigh on consumer confidence, which is now at an all-time low. It has dropped below the levels recorded during the 2008 financial crisis and at the start of the pandemic in March 2020. This could prompt the Bank of England to slow the pace of its rate hikes.
Will the fight against inflation derail the economy ?
The current macro cycle is by no means a normal one. The COVID-19 pandemic and the war in Ukraine have really complicated things for central bankers. And the re-opening of economies in the wake of the pandemic presented the greatest challenge of all. As consumer spending and capex both took off rapidly, supply-chain bottlenecks caused delivery delays and price rises.
And then the war in Ukraine broke out at the worst possible time. It exacerbated and prolonged the inflation woes of developed countries. Prices have been rising at an annual rate of between 7 and 8% – something we haven’t seen in close to 50 years. Central banks have responded to these challenges, starting with the US Federal Reserve. It has already raised rates to try and cool the economy and rein in prices.
The stock market downtrend is no doubt a sign that investors fear this fight against inflation will lead to a recession. But while the likelihood of a recession has increased recently, we still think it is avoidable – at least in the States. Unlike their European peers, Jerome Powell and the other Fed governors have a dual role: to ensure price stability and protect the economy as much as possible. So their aim is to ensure a soft – rather than a crash – landing. The airbrakes were quickly applied, and while the initial descent has been abrupt enough to spark fears of a tailspin, it looks like things will soon stabilise.
There are various signs that inflation is starting to ease and that it may be levelling off and about to start falling. We don’t expect inflation to get back to around 2% anytime soon, but any move downwards would be welcome and a relief for the Fed and for investors. Whether the stock market uptrend that began in March 2020 can continue will depend on how successful this soft landing is.
For the moment, there are still some doubts about whether it will happen, but the riskiest assets plummeted recently and now seem ready to bounce back. This is the case for low-quality bonds, which saw their risk premiums soar. It’s also true for global equities, starting with the US market, which has had a rough ride in recent weeks.
Has the bearish sentiment on China passed its peak ?
The lockdown should finally be lifted in China’s largest city. The Shanghai authorities look set to ease restrictions and get production and people’s lives back to normal by June, two months after the first lockdown measures were imposed.
Recent macroeconomic data show that economic activity came to a virtual standstill in April. As a result, Q2 growth could be non-existent or even negative, making the 5.5% target for 2022 unrealistic at present. To cushion the economic blow, the zero-COVID strategy has been replaced with fre-
quent mass testing in some cities. If that approach turns out to be effective, it could reduce the likelihood of further waves of infections and major economic disruption.
The recovery in Q3 will be particularly important, as it will happen in the run-up to the Communist Party’s National Congress in the autumn. Time is of the essence, which is why the People’s Bank of China cut mortgage rates twice last week. This decision is worth noting because it’s the first time the bank has taken action to shore up the property sector this cycle. In addition, the renewed message of support for tech leaders last Tuesday was clearly aimed at easing investors’ concerns and reaffirming that the worst of the regulatory crackdown is behind us.
These promises of further stimulus, together with the easing of restrictions in Shanghai, have sparked renewed interest in the Chinese market. The relative outperformance of the domestic market, and particularly tech stocks, in recent weeks could be a sign that the bearish sentiment has passed it peak after 12 turbulent months.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
