Key themes for capital markets in 2022 – ShareCafe

Monetary policy actions in 2022 will be critical for global markets as central banks around the world take divergent paths, with some remaining dovish while many others tighten.

Looking to 2021, a particularly interesting feature of the global political cycle was that, for once, emerging market (EM) central banks led the way in the tightening cycle. Not only was the timing of EM central bank tightening different this time around, but so was the root cause. Historically, tightening by central banks in emerging markets was often a response to growing risks to financial stability – whether it was a currency crisis, disruptive capital outflows or unsustainable credit growth – but most emerging market central banks that entered a tightening cycle last year were primarily concerned about the sharp acceleration in inflation, tightening even as growth prospects looked fragile.

Across the G10 central banks, the Reserve Bank of New Zealand, Norges Bank and Bank of England all raised key rates while the US Fed embarked on a so-called policy pivot, signaling the upcoming exit political accommodation related to Covid. Several other G10 central banks are expected to raise rates this year, starting with the Bank of Canada, which could start its tightening cycle around the same time as the Fed. We also expect a tightening cycle in Australia either in late 2022 or early 2023, while further increases are also expected in the UK, New Zealand and Norway.

After recently announcing an accelerated cut, the Fed now stands ready to raise rates for the first time since December 2018, a major development for global markets. Key considerations that can impact the markets include: timing of the first rise; the magnitude of the tightening cycle relative to market expectations, and finally the pace of the tightening. Likewise, global investors will need to pay attention to the current global macroeconomic environment in terms of the growth-inflation mix, which is a critical part of the Fed’s reaction function. The Fed’s approach to shrinking its balance sheet will also need to be watched.

Risks appear to be biased towards Fed underperformance on the policy front. There are three hikes currently planned for 2022, followed by two more hikes in 2023 and a little more tightening in 2024. Delivering three hikes may be a tall order, which can only materialize if the economy American remains in full overheating. territory. Overall, there is a risk of the Fed falling short, while the odds of producing four hikes are low at this point. This asymmetric risk has important market implications. This may suggest that the USD could top or even possibly reverse in 2022 if the Fed’s policy actions are disappointing.

Elsewhere, the ECB and BoJ will still be battling it out for the G10 most dovish central bank award. As the Fed prepares for its first rate hike since 2018, no key rate move is on the horizon, either at the ECB or the BoJ. Although the ECB recently announced that it would end emergency financing under the Pandemic Emergency Purchase Program (PEPP) by March 2022, it has in parallel expanded its regular program of purchase of assets (APP). Overall, the ECB is unlikely to consider a rate hike before the end of 2023 at the earliest. The story is similar in Japan, where the outlook for inflation – stuck at near 0% for the foreseeable future – warrants no policy action anytime soon. The People’s Bank of China (PBoC) is likely to strike a different chord this year, easing monetary policy in the face of slowing consumer spending and tight liquidity in some sectors. The PBoC already cut its reserve requirement ratio in December, but more drastic measures could be considered in the coming months.

Investment Implications

  • Expect central banks to take divergent paths depending on the idiosyncratic economic factors of each country or area, which can create opportunities for active positioning in fixed income securities
  • Many G10 central banks look likely to join their emerging market counterparts in raising policy rates in 2022, boosting short-term yields

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