From the Desk: Week of January 17, 2022

Weekly market insights from our investment teams

“The biggest surprise from 2021 was the resilience of the global recovery. Its side kick, a surge in inflation, set the table for the biggest challenge for 2022. Central banks are on the case and markets feel assured they have it under control. But the global response is already varied.

In North America, the Fed ¹ and the Bank of Canada ² are expected to raise rates three to four times this year. Meanwhile, the European Central Bank, ³ which was expected to sit back may be forced to consider rate hikes as inflation storms ahead. But China is the big surprise – it’s already cutting rates. ⁴ A slowdown in growth fueled by a targeted clampdown on some sectors and tight COVID restrictions has muffled activity.

Divergence in monetary policy will impact exchange rates and influence where global investors direct flows. It’s likely to be a volatile year.”

Dec Mullarkey Dec Mullarkey

Dec Mullarkey

Managing Director, Investment Strategic and Asset Allocation

LinkedIn

“Bank equities took significant hits in the past week with some sliding more than 10% post-earnings as investors dismayed higher upcoming expenses due to elevated compensation and technology spending. ⁵ While we do not expect these pressures to ease for the group, we still view U.S. large banks positively from a credit perspective. Valuations remain favorable compared to industrials, while banks will continue to benefit in the near term from robust consumer spending and the potential for rate hikes. Although issuance trends are always a bit of a wildcard, there could be a positive technical catalyst for large banks later in the year if the Fed reforms size-based capital requirements. Financials are also broadly less affected by the work and supply chain disruptions caused by the Omicron variant of Covid-19 compared to goods-producing sectors.”

Linda Kong Ting Linda Kong Ting

Linda Kong Ting

Director, Credit Analyst

LinkedIn

“December CPI came in at the highest level since 1982, rising 7.0% year over year. The move was primarily driven by higher prices for shelter, food, and used vehicles. ⁶ Inflation is likely to remain the star of the show, however the increasingly hawkish commentary from the Fed has markets pricing in a dramatically different 2022 than was the case even a month ago.  Numerous Fed officials were on the tape last week seemingly speaking from the same hawkish play book, expressing an eagerness to act sooner rather than later. Officials alluded to hiking rates 3-4 times in 2022 AND reducing the balance sheet in 2022.⁷ Markets are currently pricing in >99% chance of a March hike, as well as +100 bps of hikes in 2022. ⁸

The combination of these two factors create a much more challenging environment for risk assets as compared to 2021.  Recall the market adage that bull markets don’t die of natural causes…they are typically killed by the Fed.”

Peter Cramer Peter Cramer

Peter Cramer

Senior Managing Director, Insurance Asset Management

LinkedIn

Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not  constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.