The worry winding through financial markets is that hunting down rampant inflation too aggressively could squeeze life out of the US economy, particularly as unemployment rates have only recently dropped back to pre-pandemic levels.
By Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
‘’The beady eye of the Federal Reserve is keenly trained on soaring inflation and right now the central bank is set on bringing it down swiftly. It’s pretty much a given that there will be a fresh ratcheting up of rates announced by the Fed today, with expectations of a 0.5% rate hike. What is uncertain is just how hawkish the central bank will be in its forecasts and to what extent it will swoop on its $9 trillion balance sheet by offloading bonds.
The worry winding through financial markets is that hunting down rampant inflation too aggressively could squeeze life out of the US economy, particularly as unemployment rates have only recently dropped back to pre-pandemic levels. But coming down hard on demand, when supply issues are fuelling much of the spiralling price rises, either through the war in Ukraine or China’s zero-Covid policy may not have the desired effect very quickly.
However wage pressures are building amid a record number of job vacancies and businesses are struggling with the ongoing fight for talent and surging employment costs, which risk making inflationary problems more intense. There is expectation that the Federal Reserve will want to make up for lost time and get a grip on the price spiral by laying out a plan to cut back its holdings by as much as $95 billion a month, while it simultaneously continues with a steep path of rate hikes.
The Federal Reserve’s outlook is set to provide more discordant mood music for the Bank of England when it decides about rates on Thursday. Another 0.25% hike is already priced in by the market but there will be hunger for more detail on extent of further rates to come and the unwinding of its mass stimulus programme. It’s already said it won’t reinvest profits of those bond purchases but getting the timing right to sell start selling of its $847 billion of holdings without unsettling the bond markets and leading to a hike in government borrowing costs won’t be easy and the decision could be pushed into the long grass again via a consultation. The toxic combination of high commodity costs, supply chain issues, the fight for labour and the cost of living squeeze is already weighing on demand, and the worry is that a too rapid end to the era of cheap money could tip the economy into a downturn.
The knock on effects of China’s onerous zero-Covid policy are already having repercussions around the world as output drops and supply chains are squeezed. JP Morgan’s Purchasing Managers Index has notched up the first fall in global factory output for the first time since June 2020, sparked by a sharp decline in mainline China. This is keeping a lid on dramatic gains in the oil price, even though supply worries are again pushing through as the sanctions screw is set to be turned tighter on Russia by the EU today and data shows drawdowns in US crude inventories. Brent crude is currently up around 1% to above $106 a barrel.
Flutter’s trading update has shown how its bet on the US market is now paying off with the region leading the charge in revenue growth for the company. Revenues soared by 45% in the first quarter for the US market helping offset declines elsewhere as Flutter was buffeted by regulatory headwinds affecting the sector. The ease of gambling given the shift to online has rightly shone a spotlight onto financially vulnerable customers. A consultation into affordability checks is set to be unveiled by the Gambling Commission in the UK in the coming months and the government’s gambling review white paper due later this month is also expected to include broad similar proposals. If strict affordability checks such as proof of pay levels are introduced to protect problem gamblers, they could considerably disrupt earnings given that the UK market represents a sizeable chunk of income. However by expanding its global footprint particularly in the lucrative US market, which has helped increase average monthly users by 15%, Flutter is already insulating the business if the more radical proposals under consideration are brought in. ‘’
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