As recession talk subsides, inflation pressures increase
As we reach the final days of May, markets appear to be calming down. Stock markets achieved a positive week and credit spreads – the proverbial canary in the coalmine ahead of recessions – have come down sharply. So, are the concerns that have overshadowed capital markets in recent months starting to look less worrisome?
For most of May and April, declining global growth prospects have been worrying investors. There are various trackers of growth that we follow, and the graph below shows the GDP real growth ‘Nowcast’ from JP Morgan, and our adjusted version of Goldman Sachs’ current activity indicator. The Goldman Sachs indicator tends to lead the JP Morgan Nowcast by a month or two.
Labour market dynamics
Last week brought some respite for investors. The S&P 500 rallied midweek, after some strong earnings (corporate profits) reports from US retailers. It was sorely needed. Capital markets have been falling all year on the back of growth concerns, and tighter monetary policy. The global economy has clearly lost its post-covid spark, and rapidly rising inflation is starting to eat into people’s purchasing power. At the same time, the US Federal Reserve has signalled aggressively tighter monetary policy, raising borrowing costs for households and businesses. Other central banks have followed suit, with the Bank of England having raised interest rates twice already, and further hikes likely to come.
ESG – self certification greenwashing?
The debate around ESG investing flared up last week. At the FT’s Moral Money Summit, a senior HSBC executive made a series of controversial comments about climate change, and its impact on the financial system. Stuart Kirk, head of HSBC’s responsible investing team, told attendees that “Climate change is not a financial risk that we need to worry about.” He went on to disparage environmental targets or criteria for investment firms. In a now infamous quote, Kirk asked “Who cares if Miami is six metres underwater in 100 years? Amsterdam has been six metres underwater for ages, and that’s a really nice place.”