2022, Inflation and Interest Rate Movements

 2022, Inflation and Interest Rate Movements

2022, Inflation and Interest Rate Movements.

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The Inflation narrative is key to the interest rate path in financial markets. With record inflation in economies such as the US recording consumer price index (CPI) 7% yoy in December 2021, the highest in 30 years, markets will be closely watching global central banks as they anticipate Central Banker’s response to inflation.

In comparison to Q4 2021, Q1 2022 has the US Fed sounding more hawkish with other US Fed officials supporting more interest rate hikes through 2022. US Fed Officials have called for a possible 3 interest rate hikes in 2022 with a possibility of a March 2022 hike.

A big test to financial markets is the now kicked-off US 2021 fourth quarter earnings season. As inflation began to tick up in the second half of 2021 with some strategist and analyst suggesting it was “transitory” this has been proved the contrary. Stocks which are more economically sensitive also commonly referred to “value and cyclicals” are expected to reveal higher earnings (showing stronger growth as measured by profits) in comparison to tech stocks. According to Jonathan Colub, Credit Suisse chief strategist U.S. Equities “Earnings are expected to come in at 20% growth year-over-year.”

The Q1 2022 earnings season announcements will also be closely watched to see how inflation is being dealt with by companies. An uptick in inflation induces central banks to response by hiking/increasing interest rates, as interest rates are increased to slow down inflation, an inverse relationship then exists with interest rates and valuation of company stocks in this case tech stocks are more sensitive to interest rates due to their high valuation metrics. This price action will be seen through indices such as the Nasdaq 100, US 30 and the S&P 500.

With widespread global lockdowns of economies for most of 2021 in response to curbing the spread of various variants of the Covid-19 virus, inflation was seen as “transitory” when economies opened up again. However with it’s persistence further exacerbated by supply chain constraints, global central banks are now either behind the interest rate hiking cycle such as the US Fed, on par such as the South Africa Reserve Bank (SARB) with a few outliers of excessive cutting such as seen of the Turkish central bank or no action as yet with European Central Bank (ECB).

Thus Inflation is an important factor to watch through first quarter of 2022 and as the year unfolds. Equally the response of the central banks response to it as it will have a far-reaching effect across financial markets.

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Terence Hove

Terence Hove, a Financial Markets Analyst with multi-asset brokerage firm Exness completed his BBusSci: Economics at Monash University. With over 8 year experience within financial service his expertise is well developed in financial markets analytics and trading. Exness is an industry leader that provides reliable online trading in financial markets. Exness offers professional services on the above-mentioned assets, please follow the link to learn more on the offering exness.com

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