Weekly View - Biden opens the taps
Key central banks last week received further data reinforcement for hawkish shifts in monetary policy. European inflation numbers came in worryingly high, which will trigger worries among central bankers and entrench the policy hawks at the European Central Bank (ECB). Yet we think the rate hike priced in by markets for September 2022 is premature and we stand by our forecast for a first rate hike in December 2022. Meanwhile, the US labour market remains very strong, with March seeing a sharp drop in the unemployment rate to 3.6%, its lowest level since before the pandemic. Following a +25 basis points (bps) hike in March, we continue to believe the Fed will raise rates by +50 bps in May, when it should also make an announcement about shrinking its balance sheet. The Bank of Japan has been a central bank outlier by keeping policy expansionary and committing to unlimited purchases of JGBs, thus ensuring the Japanese yen continued to depreciate last week. In the absence of any real inflation, this further supports our positive view on Japanese equities.
President Biden announced plans to release significant volumes of strategic oil reserves (1mn barrels per day (mbd) over 180 days), which will have a dramatic impact on US reserve levels. Reserves coverage will drop from 180 days of net imports to 130 days. At the same time, US shale oil production has increased (by 0.3mbd year to date). President Biden also announced measures to ease regulations that restrict oil transport between ports and vessels and to put pressure on domestic oil producers to increase production. We expect shale oil production to reach 9.4mbd at end-2022. Assuming that OPEC+ abides by its pledged monthly production increases, these measures will still fall short of replacing a potential decline in Russian supply of the order of 2mbd. Since this suggests the global oil market could remain undersupplied and oil prices volatile, we remain positive on commodities.
Meanwhile, a rise in two-yield Treasury bond yields and decline in longer-term yields meant the US yield curve inverted out to 30 years. Fed officials rapidly downplayed recession fears, indicating that the two-to-10Y curve was not the appropriate indicator for recession. Equity markets rose on the decline in long-term bond yields, closing a three-week recovery and pushing S&P 500 price-earnings valuations back above 20x. The Q1 2022 earnings season will start in a week and should provide more insight into how companies are coping with the current challenges. Finally, Chinese authorities last week revised their audit secrecy law and will now allow Chinese companies listed in the US to provide all information required by US authorities. This regulatory change should prevent around 270 US-listed Chinese companies from being delisted and lift the regulatory uncertainty hanging over Chinese ADRs.