Volatility across all asset classes continues (‘nowhere to hide’ is a popular refrain) and there are some significant losses year to date.
Markets continue to agonise over inflation and the size and pace of central bank actions as well as geopolitical and supply chain concerns. Stagflation is a word that many analysts are keen to use and there seem to be daily revisions of growth forecasts.
The Federal Reserve delivered another hike of 50bp with what was initially thought to be more dovish language. This interpretation was quickly reversed provoking equity and rates markets volatility. A higher than expected CPI print further dispelled any dovish optimism and we remain on course for several more 50bp hikes in a row. In contrast the PBOC cut rates as their zero covid lockdown policy weighs on activity and in an attempt to support the stuttering Chinese property market. Jay Powell was nominated by President Biden for a second term as Chairman of the Federal Reserve, which was confirmed by the Senate Banking Committee with only one dissenting vote.
The ECB continues to have the hardest path to tread between curbing inflation and tipping the Eurozone into recession. They haven’t seen the same levels of wage inflation as elsewhere but energy costs and reliance on Russian gas are major issues. The EU does have its Next Generation fund already in place, originally to counter the fallout from COVID-19 but now potentially to be used to alleviate the effect of price pressures across the area.
The Bank of England also has an unenviable task hiking rates in the face of slowing growth, intense cost of living pressures and the Chancellor's tax rises. The reality of inflation printing at 9% means they have to keep on their path and the saving grace of record low unemployment and strong job numbers overall remains inconsistent with still maintaining rates at 1%.
The primary market remains effectively closed for High Yield issuers, ‘the end of easy money’ as one commentator put it, although one or two have managed to issue, at a price. Covid affected Carnival issued 8-year bonds on a 10.5% yield compared to paying just 6% seven months ago (both rolling over maturing debt). Investment Grade saw more activity, especially in USD, but yields on offer are much more attractive to investors. Credit spreads overall widened but in an orderly manner.
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