Q1 2022 Economic Commentary

Born in the USA

As we move into the new year, markets are expecting a new direction in global interest rates, but much will depend on the path of the pandemic and the building tensions in the Ukraine.

Covid and its variant are complicating matters however unless another virulent
variant materialises, cases and particularly fatalities are likely to fall in the months ahead. Whilst the pandemic has been difficult to predict, its impact on businesses and the economy has reduced.

The massive monetary and fiscal support will start to be withdrawn this year. The extraordinary amount of stimulus that has been ploughed into the global economy firstly assured the downturn was not as a bad as it could have been and accelerated the recovery.

In doing so and coupled with pandemic influenced supply and demand dynamics has caused inflation to rally. In the US inflation is at 7% (its highest since the 1980s and interest rates were at 11.5%), in the UK the BoE predicts that inflation will be at 6% in April.

Chair of the Federal Reserve (Fed) Jerome Powell confirmed that he was certain the Fed could control inflation. This the same Chair who explained that inflation was transitory last year and has expanded the Fed’s balance sheet by $9tn. Inflation expectations have changed markedly and demonstrates that predicting inflation is extremely difficult. However, the market is still of the belief that inflation will come under control in the latter half of 2022, perhaps anchored on the experience of the last decade or so. We remain open minded as to the path of inflation but believe that it will remain higher and more persistent than current market expectations and thus has the potential to usher in a new economic cycle, impacting assets.

Chris Davis, Chief Investment Officer