2022 has started with a global focus on interest rates and much speculation about what action central banks will take in respect of raising interest rates from their historically low levels. This is driven by the elevated levels of inflation that are now being experienced in developed world economies. The US Federal Reserve is the most closely watched central bank in terms of the direction it takes on interest rates. Inflation in the United States reached a level of 7% in December making it the highest level of inflation experienced there since 1982. There is still a strong argument that the current levels of inflation in the US are transitory and that when Covid related supply chain disruptions are overcome, there will be a drop in the inflation rate. There will no doubt be some pricing pressure relief when that does happen but an important shift in overall inflation in the US, is that for the first time in many years, there is wage increase pressure. This also affects overall pricing and is driven by a shortage of workers to fill available jobs. Another indicator of this is that the level of resignations has recently spiked which suggests that people are leaving jobs for better paid ones that are now available. The US Fed has changed its tone to a more hawkish one and it is accepted that interest rates will rise during 2022. The unknown is just how far they will go in raising interest rates to curb inflation. This is the source of much speculation by market watchers and economic commentators. If the US Fed raises rates in what is deemed to be an aggressive manner, it will have an impact on the markets. Bond yields in the US have already risen. In 2018 when the US Fed reversed its accommodative monetary policy and started raising interest rates, it shook the markets. The US Fed then changed direction back to an accommodative monetary policy and the markets stabilised. At that time inflation was not an issue but it is now. The choices faced by the US Fed are challenging. They have started by raising interest rates in a small way. If they get more aggressive in raising rates to curb inflation and markets react negatively, the choice will be to get inflation under control and continue with higher rates or soothe the markets and back off. Inflation impacts poorer people more than it does wealthy people and wealthy people are more impacted by market volatility so there is a bigger social issue to factor in as well. The Bank of England has recently raised interest rates for the first time in a while but the European Central Bank has not yet made any move on interest rates, they have indicated that they will do so during 2022.
Global equity markets finished 2021 strongly after a good year– end rally but that was unfortunately largely reversed in January. Markets retreated quite sharply in January as fears rose about the possibility of reduced asset buying by Central Banks and the prospect of rising interest rates. Early February has seen a recovery of some of those losses, but we can expect to see periodic bouts of market volatility as the dynamic around interest rates and inflation evolves over the next few months. It is mainly the high growth stocks in the US market that were affected but both the Nasdaq and S&P 500 were down over 10% at one stage in January. European markets were also weaker as were most markets in the East. The SA equity market has also recovered from a pullback driven mainly by ongoing strength in the commodity sector. Iron ore and platinum prices both rose strongly in January and that helped emerging markets and the rand also strengthened against the US Dollar reaching a level of just above R15 per USD at one stage. Energy prices continued to push higher and Brent Crude oil rose above USD 90 per barrel which was an increase of 17% during the month of January. Natural gas prices also rose sharply as concerns arose about supply disruptions if the conflict between Russia and the Ukraine escalates. Rising energy prices are adding to inflationary concerns.
South Africa started 2022 with the release of the first parts of the Zondo Commission reports on state capture. The findings are what was expected in that the reports confirmed widespread corruption and state capture in government and state owned enterprises during the era of the Zuma presidency. The scale of the theft of public funds through corrupt activities is quite staggering, but worse than that, is how these entities and parts of government were hollowed out to achieve access to state funds. Part of this process was getting rid of competent and honest people in key positions and on boards of SOE’s so that they would not obstruct the looting that was sanctioned from the top of government. The result is that there is now a shortage of the skills required to get the affected departments and entities back to a level of efficiency that would make them the enablers of economic growth that they are supposed to be. President Ramaphosa, who provided much hope of a turnaround when he was appointed, has disappointed in the manner in which he has approached the very difficult task he faced. The ANC and its issues have been placed before the interests of the country. This has to change for progress to be made. The fact that he did not fire an insubordinate minister who called him a liar says it all.
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