2022 has started with a significant weakness in the markets which are coming (at a slow pace though) to an understanding of the reality we will have to deal with in the coming year. What is that reality? At least in our view – stagflation.
To be precise, in the US we are seeing an environment of high inflation that is combined with very weak growth and even a contraction in activity in the coming months. What have we seen in the last week that reinforces this thesis?
Let’s start with the consumer price index, which rose from an annual rate of 6.8% to 7.0% and core inflation soared to a rate of 5.5%, numbers we have not seen since the early 1980s. The interesting thing about the latter figure was that the rate of inflation accelerated, with the energy component moderating (slightly). What led to the further rise in the index was an acceleration in the housing section and a further jump in car prices as inflation in the services industries continues to be high. The indications we get from the private market regarding both cars and rents are that these items are still expected to accelerate in the coming months in a way that will continue to raise core inflation.
So this is the part of “genius” (inflation) where is the complement to this difficult word – “stagnation”? (“Steg” – stagnation, recession). From last week’s data – retail sales and consumer confidence.
Retail sales have significantly surprised US headquarters with significant cross-cutting weakness – whether it is car sales, electronics clothing or food, there have been sharp declines in all segments. As a result of the December data, the forecast of the contribution of the increase in private consumption for the last quarter was cut by more than half from a contribution of 3.1 NA to a contribution of 1.4 NA to growth – according to the growth model of the Fed branch in Atlanta.
And if that’s not enough, the consumer confidence indications also published over the weekend signal to us that the weakness of the private consumer in the United States is still ahead of us. Consumer confidence in the US is at levels not seen since 2011. It is important to understand that over time, consumer confidence tends to be a very successful preliminary measure of consumer trends. Moreover, in the Consumer Confidence Index surveyed, many questions are asked and among other things they are asked what their ability is to purchase large home products, vehicles and homes. the answer? Terms of purchase are at an all-time low seen since the early 1980s. That is, households feel they can not purchase together in the past and it is no wonder – their real wages erode in a short time that does not seem very long.
In addition to signaling consumer confidence, there are two other reasons why we estimate that we will see a real weakness in private consumption at the start of 2022. The first is what we define as “consumption saturation”. That is, after a year and a half of unprecedented “boom” purchases, households are getting off the gas naturally. Think of it this way, the growth rate of product sales, especially sustainable products, is subject to demographics and in particular to the rate of household creation. Now think that every year there is a certain amount of households that purchase computers (for example) according to a certain distribution. What happened in Corona? Leave us all at home, and change (almost) the whole world the consumption habits in a very short period of time. At the same time we were inundated with money. The result? Everyone bought a lot of products in a very short period of time. Are any of you who bought a computer, iPhone or car in the past year likely to buy next year as well? Probably not. That everyone buys at the same time, it will have a price both in the form of inflation that we see today, but also in the form of a significant decline in purchases in the future. Think of the last year and a half as a period in which acquisitions from the following years were brought forward. the meaning? “Consumption saturation” that will lead to weakness in product sales and therefore to weakness in private consumption.
Beyond that, the first quarter data is also likely to be weak due to the spread of the omicron in the world in a way that is expected to hurt service consumption, but at least in this spending segment, the weakness is expected to be short-term and recovery should probably begin towards spring.
The Bottom Line? The first half of 2022 will be characterized by weakness in economic activity, high inflation and a Fed that raises interest rates aggressively. Not an ideal mix for stock markets that also suffer from very high multiplier levels.
At least in our view, There is room to diversify the investment portfolio outside the US – Mainly Israel and Europe and to some extent also some emerging markets now constitute better investment alternatives in relation to the US where caution should be exercised.
Has inflation reached Israel?
The consumer price index surprised upwards in December with an increase of 0.3% (the consensus was + 0.1%). Overall, in 2021 the consumer price index rose by 2.8%, the highest rate since September 2011.
Significant price increases were recorded in the housing section which jumped 0.8% and completed an increase of 3.4% in the last year, furniture and equipment for the home which jumped 0.7% and completed an increase of 8.3% and food which rose by 0.5% and completed an increase of 3.5% in the last year. The known prices of January. It does not end here as overseas travel has also risen more together than expected, with car prices soaring 1.2% and completing a 7.9% jump in the past year.
In our view, these key clauses reflect the increasing inflationary pressures in Israel, both internally and externally. Outside – It seems that the disruptions in global supply chains and high prices abroad are beginning to seep much more prominently into the local environment.
On the inside, the section on owned housing services is rising rapidly as data from the housing market continue to signal warming – housing prices (outside the consumer price index) have risen by 1.4% and completed an increase of 10.6% in the last year. In our estimation, housing prices in Israel are expected to continue to rise in 2022 against the background of the dynamics between the strong demand and the supply that has been hit in the last two years and which in any case takes a long time to respond.
Inflation, then, has reached Israel and we need to start looking at the core index, which has already reached a level of 2.7%, a level that will definitely catch the attention of the Bank of Israel. In light of these data, in the coming months we will see the annual inflation rate in Israel rise above 3.0% and in light of the fact that inflation expectations in the short parts of the curve have already reached 3.0%, we are likely to see them cross the upper price stability target. Will be pushed there.
Recall that the Bank of Israel is actually telling us (not explicitly) that as long as inflation is in the target range, and inflation expectations are anchored within the price stability target, they see no reason to act. Well this index brings the Bank of Israel very close to this place where it will have to signal to us much more clearly in the direction of raising interest rates.