• Clifford Bennett, Chief Economist at ACY


• 17.03.2022 03:30 pm
#stocks

Stocks clear the first Fed Hurdle magnificently. Inflation lurks.

The US Federal Reserve raised interest rates just 25 points in the first of what will be a strident rate hike cycle.

Expect the Federal Reserve to be raising interest rates at every meeting for the rest of this year.

Especially, if it is going to move in baby steps. Entirely inappropriate for the hurtling speed of inflation, but in respect of the increased uncertainty over the Russian/Ukraine conflict.

Inflation is already at 7.9% and most certainly going higher as indicated by Producer Price Inflation. While Oil prices are pulling back from the extreme peak of the start of war, they nonetheless remain highly elevated. Anything above $80 a barrel is of concern. At current levels the inflation push may not be as high as first feared but it will still be significant.

Then there is food. From wheat to soy, these prices shocks will continue to roll through the shopping aisles like mini-tsunamis all throughout this year and quite possibly into next. This is a profound and lasting price shock that policy makers will have difficulty dealing with.

The raising of interest rates will not impact this form of basic needs inflation. Petrol for the SUV, food on the table, are not consumer choices, and the level of interest rates will have zero impact.

The first wave of global inflation was due to true supply chain disruption, but this quickly built into a tsunami as all business owners, from the corner store to the global corporation, as if in global unison last year began raising prices to increase profit margins substantially. Under the guise of supply chain and other Covid disruptions. This explains fully why both earnings and inflation have been simultaneously higher over the past year.

The second wave, in fact an again elevated tsunami sweeping the world clear of doubt is the war in Ukraine. Immediately through energy shocks, which may not yet be over as nations realise the need for holding larger reserves in the future, and the on-going risk that at any moment Russia could still dial down or turn off entirely the operational pipeline to Germany/Europe. If Russia feels to arduously cornered, there will be debt defaults and energy supply reduction. On top of already unavoidable food supply disruption. One aspect people may not be paying enough attention to is the disruption of actual supply. Not only will food prices become scary for consumers in many parts of the world, there may be on too frequent occasion actual scarcity of some food basics.

Raising interest rates will not stop inflation.

The Fed cannot control these inflation forces no matter how high it raises rates. We will see US inflation at 10% and the Fed conducting baby rate hikes due to the heavy mist of war on the outlook for the US and global economy.

While equity markets have celebrated on the day the baby step approach from the Fed, the real economic challenges facing the world and the US are by no means diminished. The prospect of prolonged recession in Europe and severe food pricing globally with on-going energy risks make for a cauldron of potential disappointment over the coming months.

The war in Ukraine, even if resolved now, will have a  long lasting global impact, and could not have come at a worse time. Just as a second wave can double up on the one before it as we play by the sea side, the market could still be caught by surprise as the inflation tsunami hits home.

Stock markets may well have another 24 hours of impressive strength, but it remains to be seen if this is just window dressing on a darker reality.

Clifford Bennett
ACY Securities Chief Economist.

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

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