Ear to the Ground

July 22 2022

It ain’t half hot! In a week which saw record temperatures in the UK, it wasn’t just the weather which had us all a lot hot under the collar. UK inflation figures revealed that CPI had increased to 9.4% in June, the highest reading since 1982 and marginally above market forecasts of 9.3%. It is perhaps unsurprising to hear that fuel and food were the largest contributors to the increase. Perhaps the Bank of England Monetary Policy breathed a sigh of relief at the core CPI (exc. food, energy, fuel and tobacco) data which slowed for a second month to 5.8% in June from a 5.9% reading in May.

Inflation continues to remain an issue in the Euro area also. Annual inflation to June came out at 8.6% which compared to 8.1% in May although it was in line with forecast. It was still strong enough however to force the hand of the ECB, who on Thursday increased rates by 0.5%, their first increase since 2011. The central bank had previously committed to a 0.25% hike, but inflationary pressures were such that it was deemed that a greater move was warranted. With the US Federal Reserve having surprised in June with a larger expected rise, and now the ECB, can a lesser degree of certainty now be placed on forward guidance central banks may give? Or do we give credit for reacting outside their guidance in what are clearly difficult to manage times? Concerns over economic growth continue to build, German manufacturing and services surveys suggesting that these are now contracting.

Signs that higher inflation and central bank policy is also having a negative impact on economic growth in the US. This week we saw numerous releases from the Philadelphia Fed were weaker than expected. Their survey of manufacturing conditions was much weaker than expected, with the new orders component particularly weak. Business conditions also continued to show signs of deterioration.

We are now into the quarterly earnings season in the US and analysts will be keen to see what was delivered in the second quarter but more importantly what forward guidance companies are able to give for the second half of this year, particularly in light of this economic weakness. Snap, the Snapchat parent, were the latest company to report a disappointing trading update, with revenues from advertising much lower than expected. The market will keen to understand if this has ramifications for the advertising industry and broader technology sector in general. Snap, along with companies such as Apple, have already indicated that they plan to substantially reduce their rate of hiring, perhaps providing some breathing space for an already tight labour market.

The July Bank of America Global Fund Manager Survey reflects the weaker data being seen, with the net percentage of participants saying a recession is likely, on the increase. Looking back over the period since 2006, the current reading was only surpassed by previous peaks in March 2009 and April 2020. As a consequence, the net percentage of those surveyed taking higher than normal risk within their portfolios was at a lower reading than that seen in October 2008.

The key question for investors is, given the market moves we have already seen in 2022 so far, how much of this news is already priced in. As we know, markets are more of a forward rather than backward looking indicator.

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