Margin Matters
14 February 2022
Margins are, I believe, going to be a hot topic through at least the next reporting season in April and May.
5 min read
14 Feb 2022
GDP recorded its highest increase since WW2 last year, with a growth rate of 7.5%. Much as that number might be heralded as a sign of great management by the government, it mainly represents the recovery from the drop of 9.5% in 2020. The year ended weakly, as expected, owing to Omicron, with leisure and hospitality bearing the brunt of the pain. Vaccinations, boosters and testing helped to provide some support to overall activity. With services in decline, it was more encouraging to see growth in both the construction and manufacturing sectors. In the latter, surveys suggest some easing of supply chain pressures. The next quarter or so will be tricky, with lingering Omicron effects, soaring energy costs and geopolitical uncertainty. Even so, Investec Bank’s economics team still forecasts 4.5% growth in 2022, well above the pre-Covid trend. However, we note that the investment bank JP Morgan has published a material downward revision to its expectations for UK GDP this year. It cut its forecast for year-on-year growth by Q4 from 3% to 1.6%. Overall they expect annual GDP to grow by 3.7% this year, rather than their 4.8% prior estimate.
Yet another upside surprise in the US inflation data, even though there was some respite on the energy and supply chain fronts. Inflation looks broader and stickier than ever. Both headline and core measures rose 0.6% month-on-month, with the headline year-on-year reading of 7.5% being the highest since 1982. And while easing shortages of new cars will help matters in 2022, the housing rental component will take up a lot of any slack. Following hawkish comments by Federal Reserve member James Bullard, the market is now more expectant of a 50 basis point rate increase in March, with some even expecting an intra-meeting rise before then. Goldman Sachs is the latest investment bank to predict a total 1.75% increase in the Fed Funds base interest rate this year.
The total social financing (TSF) print for January in China was higher than even the most bullish estimates at RMB 6.2trn, 46% above the 5-year trailing average for the month and well ahead of expectations set at RMB 5.4trn. Chinese TSF is a hugely important number for commodity demand, as China buys 40-70% of the worlds seaborne supply. It’s clear the Chinese government has acted early and aggressively to bolster what it feels might be lingering economic pain in the wake of the national property crisis and extended Covid lockdowns around the country. But, to temper expectations, it also sets a very high base, and February’s stimulus is often the weakest of the year owing to New Year celebrations. Even so, the authorities continue to ease off the brakes and gently dab the accelerator. We also note the upward inflection in China’s credit impulse.
Source: FactSet
Source: FactSet
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