Today, our team has chosen for you an interesting analysis by J.Safra Sarasin Bank on the different effects of the lately published figures on economics that will influence the behaviour of the Central Banks around the world, particularly of the EBC and the FED in USA.
We offer you this as an only item, because there is a lot of wisdom in the feature and we strongly recommend the careful reading.
Have an excellent week with many closed deals!
Here starts the item:
A brutal wake-up call for the ECB
The Euro Area inflation rates published this week were nothing less than a brutal wake-up call for the ECB. Price pressures are more persistent than expected, GDP is back to prepandemic levels and unemployment has fallen to the lowest level since the start of the monetary union. Consequently, the pressure on the ECB to tighten policy is increasing,
President Lagarde opened the door for an adjustment of the ECB monetary policy tools as early as March, and hence our own ECB-call is under review now. Markets reacted quickly. The surge in short-term rate expectations that has engulfed the Dollar- and Sterling markets since September last year has spilled over to the Euro A
While we think that current rate expectations for 2022 are unlikely to be realised in full, higher medium-term expectations are here to stay. Upward pressure on bond yields andthe trend towards a flatter yield curve will therefore persist. The surge in COVID cases in early January has weighed on activity, with the manufacturing and services ISM PMIs falling 1.2 and 2.4 points respectively. Still, these surveys suggest that demand remains strong, and with new cases dropping rapidly, the pace of activity should also rebound. Less encouragingly, these latest readings also indicate that inflation will remain red hot in the first quarter of the year.
A much less benign US Q4 earnings picture is shaping up. Gross beats have dropped sharply. Less than 70 % of companies have managed to beat consensus earnings estimates so far. Margins appear solid, yet have benefitted from an outsized contribution from Apple and Alphabet. In light of these numbers, we think a large positive impact of reported earnings on consensus numbers is unlikely. Revisions are set to slow further in our view.
European Macro – Unexpectedly high inflation rates put ECB under pressure
By guest author Dr. Karsten Junius, Chief Economist at Bank J. Safra Sarasin, Zurich (CH)
The inflation rates published this week were nothing less than a brutal wake-up call for
“team transitory”. Instead of declining, they showed that inflation is more persistent and
likely remains above target for a while. At the same time, GDP is back to pre-pandemic
levels while the unemployment rate fell to the lowest level since the start of the monetary
union (EMU). Naturally, the pressure on the ECB to abandon its negative rate policy
is increasing. At the ECB press-conference President, Lagarde opened the door for an
adjustment to the ECB monetary policy as early as March and did not repeat that an
interest rate increase would be unlikely this year. Our own ECB-call is under review now.
Inflation rate is at its highest level since the start of the European monetary union
The inflation data for January were shocking: Instead of falling from 5.0 % yoy to 4.4 % yoy as expected by the Bloomberg consensus, consumer prices increased by 5.1 % compared to last January (Exhibit 1). Consensus estimates were probably never that far away from the actual print. The increase of the inflation rate can largely be explained by higher energy prices that rose by 6.0% mom in January alone. While core inflation fell compared to De-cember, it did so less than expected. This highlights the breadth of price pressures, which originate to a large part from the ongoing supply bottlenecks.
Producer prices confirm the very broad price pressures
Producer prices – published for December this week – confirm the trend. Their increase of 2.9 % mom and 26.2 % yoy is the most extreme in the last 25 years (Exhibit 2). Even without energy, producer prices increased by 10.0 % yoy as many intermediate goods are becoming more expensive as well. Given these inflation data, it doesn’t come as a surprise that price expectations for the coming months are at very elevated levels as well (Exhibit 3). Price expectations should be interpreted carefully as survey respondents often have very adaptive expectations – meaning that they simply extrapolate recent trends. Still, this time it happens against the backdrop of a relatively tight labour market. In January, the unemployment rate fell to 7.0%, its lowest level since the start of EMU and definitely the success of the very expansionary economic policies to combat the adverse economic ef-fects of the pandemic (Exhibit 4). So far, wages have not been picking up and they are also not likely to increase materially this year as few wage negotiations are scheduled to take place in the coming months. But this might only be a question of time. An increasing num-ber of companies both in the service and the industrial sector report labour shortages (Exhibit 5). After years of miserable wage growth it would come as a surprise if employees didn’t insist on being compensated for higher prices at all.
Solid GDP perspectives
Finally, GDP data for 4Q 2021 was also published this week. At 0.3% qoq, it was close to our estimate and confirmed that supply bottlenecks and high energy prices weigh on household spending and corporate investments alike. For the first quarter, we are only slightly more optimistic, but we expect a strong rebound in the second quarter once COVID restrictions are likely to be eased in most countries and COVID infections fall due to a higher degree of immunity and warmer weather.
The degree of highly expansionary monetary policy cannot be justified much longer
At its policy meeting, the ECB has taken note that (i) inflation is much stronger than ex-pected at the time of its latest macro projections, (ii) the labour market is getting tighter and (iii) the favourable perspectives for economic growth. President Lagarde opened the door for a tightening of its monetary policy at the coming meetings. She refused to repeat her message that a rate hike is very unlikely this year and also didn’t push against market pricing. But she also dampened early rate hike expectations by (i) confirming to end asset purchases before hiking rates, (ii) referring to the low wage growth environment and (iii) stating that she doesn’t want to see the ECB “rushed into a process”. The absence of wage pressures would confirm that little has changed for underlying inflationary trends such that numbers for 2024 are unlikely to be revised up before June or September. As a result, conditions for an earlier rate hike are not met. However, neither is the current economic data supporting a continuation of asset purchases. We consider a faster reduction of bond purchases as appropriate. As a consequence, our policy rate forecasts are under review as well.
US macro – A winter soft patch
By guest author Raphael Olszyna-Marzys International Economist
The surge in COVID cases in early January clearly weighed on activity, with the manufac-turing and services ISM PMIs falling 1.2 and 2.4 points respectively. Still, these surveys suggest that demand remains strong, and with new cases dropping rapidly, the pace of activity should also rebound. Less encouragingly, these latest readings also indicate that inflation will remain red hot in the first quarter of the year.
Both ISM surveys indicate that the US econ-omy remains in a demand-driven but supply-constrained environment
The surge in COVID cases in early January clearly weighed on the pace of manufacturing and services activity. According to some estimates, more than 5 million workers had to self-isolate in early January, resulting in a flurry of flight cancellations and of closures of hospitality venues, as well as constraining production and business activity more broadly. The resurgence in COVID cases also meant that the improvement in supply delivery per-formance in the services sector that was evident in December was not repeated in Janu-ary. And despite the improvement in the pace of employment in the manufacturing sector, the overarching theme that emerges from these two surveys is that the US economy re-mains in a demand-driven but supply-constrained environment. Looking over the next few months, these same surveys suggest that demand for goods and services will remain strong. Indeed, firms’ customers continue to see their inventories stocks as far too low, and new orders continue to come in strongly, albeit at a somewhat slower pace. But they also suggest that inflation is likely to remain close to its 40-year historical peak
EU fixed income – ECB rate policy in the crosshairs
By guest author Alex Rohner, Fixed Income Strategist
The surge in short-term rate expectations that has engulfed the Dollar- and Sterling mar-kets since September last year has finally spilled over to the euro area. Given the infla-tionary pressures and a positive economic outlook, the ECB probably feels they need to hike rates sooner than later, but they need time to appropriately prepare the ground. While we think that current rate expectations for 2022 are unlikely to be realised in full, higher medium-term expectations are here to stay. Upward pressure on bond yields and the trend towards a flatter yield curve will therefore persist.
Surge in rate expectations spills over to the Euro Area
The surge in short-term rate expectations that has engulfed the Dollar- and Sterling mar-kets since September last year has now finally spilled over to the euro area. Just before the ECB statement and the press conference, the Bank of England (BoE) had raised the Bank Rate by 25bp, with four out of nine members of the Monetary Policy Committee ar-guing for 50bp. President Lagarde referred to the March meeting for further updates on the calibration of monetary policy, she did not explicitly rule out a rate hike in 2022 and stated that risks to the inflation outlook are to the upside, hence markets did what they usually do when uncertainty rises: they price a risk premium into the curve. In fact, mar-kets are now set for over two hikes in 2022 and a total of four over two and three years, putting the implied ECB deposit facility rate at above 50bp at the end of 2023 and 2024 (Exhibit 1).
The ECB needs more time to appropriately prepare the ground for a rate hike
We need to go back to before the global financial crisis to see four sequential ECB rate hikes. The last attempt to hike rates in 2011 ended prematurely after 50bp, when the euro area crisis broke out. In that regard, it is important to realise that the ECB’s sequencing implies that lift-off will be done only once net asset purchases of euro area government bonds (PEPP and APP) have ended. The sharp spread widening of peripheral bonds today reflects the ECB’s dilemma. The governing council probably feels they need to hike rates sooner than later, given the inflation outlook, but they need time to appropriately prepare the ground for it.
Higher medium-term rate expectations are here to stay, the yield curve will likely flatten
Therefore, the ECB will not lean against higher rate expectations as they already do some of the tightening for them. While we think that current rate expectations for 2022 are un-likely to be realised in full, higher medium-term expectations are here to stay. Upward pressure on bond yields and the trend towards a flatter yield curve will as well (Exhibit 2).
US equities – Half-time of US Q4 earnings season: normalisation
By guest author Wolf von Rotberg, Equity Strategist
With close to half of S&P500 constituents having reported Q4 results, a much less be-nign earnings picture than in previous quarters is shaping up. Gross beats have dropped sharply. Less than 70% of companies have managed to beat consensus earnings esti – mates so far, below the 5-year average of 74%. Margins appear solid, yet have benefit-ted from an outsized contribution from Apple and Alphabet. Excluding these two names, margins fall back to average levels over the past 5 years. The same holds for the EPS surprise (aggregate EPS vs consensus expectation). Including Apple and Alphabet, total S&P500 EPS are 16% above consensus expectations. Excluding the two names, the sur-prises drop to 8%. In light of these numbers, we think a large positive impact of reported earnings on consensus numbers is unlikely. Revisions are set to slow further in our view.
© Copyright Bank J. Safra Sarasin Ltd. All rights reserved.
Newsletter of last Week
LVMH annual fashion sales surge 47 % on US, China – Farfetch plans beauty launch with Violet Grey acquisition – From Schiaparelli to Chanel: The 12 Best Looks of Couture Season https://textile-future.com/archives/83545
The highlights of last week’s NEWS, for your convenience, just click on the feature to read.
Nestlé Health Science to acquire majority stake in Orgain https://textile-future.com/archives/83872
Alpine announces Dieppe based production for its new GT X-Over https://textile-future.com/archives/83602
New ownership starts with the production of StreetScooter Engineering vehicles https://textile-future.com/archives/83839
PETA announces winners of 2021 PETA Fashion Awards https://textile-future.com/archives/83844
Swiss Science Prize Marcel Benoist: the nomination procedure begins https://textile-future.com/archives/83886
Young Scientist Award: Lenzing’s new prize for research projects on ethical and sustainable fashion https://textile-future.com/archives/83890
H & M Hennes & Mauritz AB Full-year report https://textile-future.com/archives/83570
VF Reports Third Quarter Fiscal 2022 Results; Reaffirms Full Year Fiscal 2022 Earnings Outlook https://textile-future.com/archives/83613
Fortress plans to sell 17 M&S stores in GBP 70 million deal https://textile-future.com/archives/83682
UBS’s fourth-quarter 2021 results and full year https://textile-future.com/archives/83693
HeiQ’s latest news https://textile-future.com/archives/83754
Clariant signs agreements to divest 50 % stake in Scientific Design joint venture to SABIC https://textile-future.com/archives/83774
With the right partner to the top of the shoe fabric market https://textile-future.com/archives/83921
Main EU trade partners for services in 2020: USA and UK https://textile-future.com/archives/83653
EU Contingent liabilities and non-performing loans in 2020 https://textile-future.com/archives/83668
Rising prices dampen Swiss consumer sentiment https://textile-future.com/archives/83691
Swiss retail trade turnover fell in December by 0.5 % – rise of 4.2 % in 2021 as a whole https://textile-future.com/archives/83717
EU meets 2020 renewable energy target in transport https://textile-future.com/archives/83747
Renewables on the rise, coal continuously falling in EU https://textile-future.com/archives/83765
Slowed economic recovery at the end of the year for German textiles and clothing sectors https://textile-future.com/archives/83801
EU’s trade competitiveness in goods and services https://textile-future.com/archives/83913
Swiss Empa: Diagnostics – Early detection of dementia https://textile-future.com/archives/83863
EU Commission opens investigation into licensing and distribution practices of fashion house Pierre Cardin and its licensee Ahlers https://textile-future.com/archives/83647
EU Commission partially waives commitments made by Gategroup to obtain clearance of its acquisition of LSG European Business https://textile-future.com/archives/83662
Europol: EU Commission welcomes political agreement on stronger mandate https://textile-future.com/archives/83796
International Conference on AI (February 21 – 25, 2022) https://textile-future.com/archives/83597
XSYS to demonstrate full flexo portfolio at INFOFLEX 2022 https://textile-future.com/archives/83804
New Hydrogel Types, Applications and Opportunities Explored by IDTechEx https://textile-future.com/archives/83834
WIPO Madrid Case Study Highlight: Fast Retailing Co., Ltd., One of the World’s Largest Apparel Retailers https://textile-future.com/archives/83812
US creatives call for copyright protection https://textile-future.com/archives/83876
BASF modernises production of chloroformates and acid chlorides at Ludwigshafen site https://textile-future.com/archives/83677
What We Can Learn From How the 1918 Pandemic Ended https://textile-future.com/archives/83780
Save water and celebrate with us: RECYCROM™ X Blue of a kind https://textile-future.com/archives/83587
Patterning from the cloud https://textile-future.com/archives/83633
Prada adds two ESG experts as non-exec board members https://textile-future.com/archives/83707
Archroma launches EARTH SOFT system based on Siligen® EH1, a new vegan textile softener with one-third plant-based active content https://textile-future.com/archives/83770
Swiss Empa – Landmark research grant for quantum materials – Carbon nanomaterials for future quantum technologies https://textile-future.com/archives/83639
Asos directors set to exit https://textile-future.com/archives/83808
Joules warns profits will be dented by Omicron and supply chain issues https://textile-future.com/archives/83824
US Fashion Forward https://textile-future.com/archives/83608
EU initiates WTO dispute complaint regarding Chinese restrictions on trade with Lithuania https://textile-future.com/archives/83744
High shipping rates and digital services sustain services trade recovery in Q3 of 2021 https://textile-future.com/archives/83785
STOLL invites you to the next series of online courses for k.innovation CREATE DESIGN https://textile-future.com/archives/83731
WIPO – “Exploring the PCT” webinar series: Best practices for handling recording of changes (February, 10, 2022) https://textile-future.com/archives/83880
WTO DG Okonjo-Iweala tells sustainability conference “trade is part of the solution to challenges we face” https://textile-future.com/archives/83575
WTO Secretariat updates members on COVID-19 reports and new tools https://textile-future.com/archives/83712