Read More
Richard Scrope
Fund Manager
Central bankers appear to be currently embarking on a high stakes game of poker, waiting to see who can make the largest increases in interest rates at each meeting without causing the market to call its bluff. Despite Central Bankers changing rhetoric from transitory to embedded inflation, and no recession to only a mild slowdown, it is apparent that the market is long past believing their predictions despite the continual hawkish stance by many of the US Federal Reserve members.
The chart above shows that the market does not believe that current Federal Reserve dot plot, and the five-month the future swap rate indicates that the Fed will begin to cut interest rates in early 2023. Although the current rhetoric is so hawkish that a further increase will probably occur at the next meeting, we believe that we are nearing the end of the increasing leg of the rate cycle.
Rates around the world (ex-China) have been on the increase, with even Europe ending its eight-year tenure of zero/negative interest rates which followed after it increased rates in 2011 by 50bp, only to immediately cut them again when none of the other central banks followed suit.
The chart above shows that the market does not believe that current Federal Reserve dot plot, and the five-month the future swap rate indicates that the Fed will begin to cut interest rates in early 2023. Although the current rhetoric is so hawkish that a further increase will probably occur at the next meeting, we believe that we are nearing the end of the increasing leg of the rate cycle.
Rates around the world (ex-China) have been on the increase, with even Europe ending its eight-year tenure of zero/negative interest rates which followed after it increased rates in 2011 by 50bp, only to immediately cut them again when none of the other central banks followed suit.
However, and rather unfortunately for investors, the central bankers’ main concern is not so much the growth of the market, but the level of inflation that led to pressures on the costs of living worldwide. While we concede that we had expected the headline rate of inflation to fall earlier this year as the year-on-year lagging effects came into force, the war in Ukraine blew this assumption out of the water as commodities and oil spiked, the latter registering a 72% year on year increase on top of the previous year’s 64% increase.
Since the peak in June commodity prices have corrected significantly, and as the chart below shows the rolling 12 month change in the CRB Commodity Index has posted two months of negative readings, which historically has led to a fall in the rate of PPI. The rate of change, not the absolute level is the most important factor for inflation, as annualization then comes into play.
Another inflationary factor that played out last year, was the pressures on the supply chain, as companies struggled to fulfil the increase in demand in the wake of the pandemic. Truck driver scarcities to port congestion, semi-conductor shortages, and mothballed production sites, all led to substantial increases in prices for companies. Most companies managed to pass through these costs to the end consumer, often with a lag, and thus the bottlenecks had minimal impact on profit margins. Since last year these pinch points in supply chains have started to normalise and the justification for companies to impose further price increases has waned. Again, this has little to do with central banks’ interest rate policies, yet has a dampening effect on inflation.
This also comes through in prices paid, which has fallen substantially recently and normally acts as a good leading indicator for the direction of PPI.
With all these deflationary factors coming into play, sparing any other Black Swan event, we expect inflation will start to fall away, and even though most of these factors have little to do with the actions of Central Bankers, we expect that they will tout the success of their actions in bringing down inflation; plus ça change.
WARNING: All information about the VT Tyndall Global Select Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not