Growth, Inflation & Policy
SLOWING GDP GROWTH
- Growth is unquestionably decelerating, while inflation prints are seemingly perpetually overshooting. Coming into the year, we believed inflation would be the key driver of economic and capital-market returns. Putin’s invasion of Ukraine has only served to intensify this critical dynamic and has put the Federal Reserve in a more precarious position.
- Inflation developments have increased the odds that the Fed will pursue a fast tightening-cycle which has historically limited the upside in equities and most other risky assets.
- The Atlanta Federal Reserve GDPNow (a running estimate of real GDP growth based on available economic data for the current measured quarter) is forecasting first quarter real GDP growth to be just 1.3%.
INFLATION RUNNING RAMPANT
- The U.N. Food Price Index reached a new all-time high, eclipsing the 2011 Arab Spring and 2008 Financial Crisis levels.
- The index is up 19% year-to-date and 34% over the past year. The one-month price change of 12.6% in March is the highest on record, by about double, going back to 1990.
- Not only are wheat and corn prices flying higher but so are input costs such as fertilizer. According to the fertilizer manufacturing component of the Producer Price Index, prices are about 10% below the highest ever experienced in 2008 when oil prices were well in excess of $100 per barrel.
- Ignoring the impact inflation has on investments, food prices and scarcity could become a real humanitarian issue this year.
RATE HIKE EXPECTATIONS
- Pre-invasion of Ukraine, the market was expecting the Fed to raise interest rates approximately seven times in 2022.
- The number of expected hikes is now approximately eleven. What’s more, the market is pricing in hikes of 50 basis points at the next three Fed meetings in early May, June and July (as evidence by at least a 60% probability based on the futures market).
- Inflation’s unrelenting moves have also forced the Fed to start unwinding their balance sheet, probably beginning in May.
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