According to figures released last month, inflation in the US hit 7.9% in February, the highest since the 1980s with inflation expected to remain around the 8% mark for March. In light of this, last month the US central bank (the Fed) raised interest rates for the first time since 2018. Whilst this hike was very much expected, (in fact markets may have been shaken if it had not been forthcoming), it does pose the question of how rising interest rates will affect the consumer and the post-pandemic recovery.
The consumer underpins the US economy, but with rates rising, consumers will feel the squeeze first hand. Debt becomes more expensive, with the US 30-year mortgage rate currently sitting at levels not seen since January 2019. Despite this, consumer confidence has risen steadily since the beginning of 2021 and one reason for this is that the labour market continues to tighten in the US.
Consumer confidence recovers
Source: Refinitiv
With initial jobless claims coming back towards pre-pandemic lows and job openings hovering around all-time highs, resultant wage growth is providing a cushion against inflation for the consumer. This has helped underpin earnings and the recovery for equities, notwithstanding this year’s volatility.
The balancing act for the Fed will be the pace at which they raise rates and when. If they can bring inflation to heel, something which will also be affected by a de-escalation in Ukraine, this will provide a more attractive outlook for individuals feeling the pinch. Implement a tighter environment too quickly, however, and they may stifle consumer spending power. (The market has currently priced in 5-7 rate rises this year.)
Quarter-to-date
This week ushered in the end of March and the end of Q1 2022. It’s been a rocky ride for much of the quarter, with global markets selling off through January and February amidst concerns around high inflation, rising energy prices, interest rate speculation and, of course, geopolitical uncertainty in relation to events in Ukraine. Although March initially echoed similar sentiment through its first two weeks, we have seen a stabilisation in some of those concerns and a partial claw back of losses since the middle of the month.
However, we have not by any stretch seen a full market recovery. Global equities are still off by 5.5% year-to-date. In some sectors equities are sat at lower levels, with global growth equities down 9.8% and the US NASDAQ tech index down 9.1%. Many of the above concerns remain present, though appear to have been priced in by investors. The coming quarter will provide an understanding of the longer-term environment for inflation, central banking policy and the state of peace talks between Russia and Ukraine.
