Rabobank: After Two Very Unusual Years, 2022 Might Be The Year That Finally Reveals The True State Of The Economy

By Stefan Koopman, Senior Macro Strategist at Rabobank

Happy New Year from RaboResearch! We wish you all a healthy, happy and successful year, and hope that you will stay with us throughout 2022.

The first trading day of this year was a rather quiet one in terms of news, with relatively thin liquidity and significantly below average volumes as markets were closed in Japan, China and in the United Kingdom. Elsewhere in Europe and in the United States, investors picked up more or less from where they left off in 2021, meaning that the risk mood was generally positive. Bonds slumped and equities reached fresh record highs. The MSCI World index rose 0.3%. This is, of course, far from any reliable indication of how the rest of the year is going to play out: the global index rose 0.7% on the first day of trading in 2020, while it fell 0.7% as 2021 commenced. It’s just another day, really.

That said, it is a new year, P&L’s are back at zero, so the financial punditocracy is invited to identify the risks in store for 2022. This typically culminates into an extended list of “known unknowns”, which, by its very definition, isn’t particularly revealing. However, the impact of this type of risk is still potentially large, as long as it is not fully priced. The most prominent one is the Fed overcompensating for its fears of a looming wage-price spiral, which could push the global economy back into a recession. But what about the increasingly tight and demanding labor markets; or the numerous scenarios in which distorted consumption patterns, supply-chain snarls and inflationary pressures don’t normalize anytime soon; or China continuing to fight last years’ war as it obstinately pursues a zero-Covid policy; or the simultaneous reversal of fiscal stimulus in *all* developed economies; or a Europe without energy or direction just as Merkel breaks in her new hiking boots? And what about Russia, Ukraine, Iran, Turkey, Afghanistan or climate change? Let alone the unknown unknowns… the commentariat hardly ever gives those a mention ;-)!

The overall consensus is that global growth will ease, that the easy money has already been made, and that the expected return per unit of risk moderates. We forecast global GDP growth for 2022 at 3.9%, down from 5.6% last year, as the low-hanging fruit of re-opening has been consumed and supply bottlenecks and higher prices for tradable goods and commodities curb discretionary spending. That said, although global inflation remains elevated well into 2022, we remain of the view that a return to wage-price spirals in major economies seems improbable and that price pressures will weaken (or reverse?) without central bank interventions once market forces are able to ease supply chain problems. That would mean inflation is *transitory* after all.

So long as inflation does indeed appear to be receding, global bond markets should be able to weather some modest monetary policy tightening. In fact, as our Rates team has outlined time and again, we do believe that central bank efforts to tackle supply-side price pressures by curtailing demand through tighter financial conditions is only likely to strengthen the already clear market message that inflation is set to retreat from its current lofty levels over the longer run. Even though US inflation accelerated to a 40-year high of 6.8% in November, this helps to explain the notable flatness of the Treasury curve even before policy normalization has commenced. The economy may not have the capacity to sustain a “normal” policy tightening cycle if demand is indeed softening with uncustomary rapidity. This is what makes 2022 particularly interesting: after two very unusual years, which didn’t remotely resemble anything of a regular business cycle, it might be the year that finally reveals the underlying health of the economy.

Day ahead

Earlier this morning, China’s Caixin Manufacturing PMI came in at 50.9 in December, up from 49.9 in November and reaching its highest level since June. The survey notes that output rose at its quickest rate in the past year as supply constraints and inflationary pressures eased. This chimed with the latest batch of manufacturing PMIs in Europe and the US, which indicated that supply bottlenecks and delivery times improved. That said, in China, future output expectations hit its lowest point since April 2020 as firms worry about the potential shock to supply chains of Covid-19 outbreaks. Note that the one in the city of Xi’an –a major industrial hub– caused authorities to enact sweeping restrictions on a scale rarely seen since Wuhan. 

Our commodity strategist Ryan Fitzmaurice notes that oil markets are gearing up for what is likely to be an exciting year with expectations for both oil supply and demand to grow meaningfully in the months ahead. In fact, global oil demand is widely expected to reach new all-time highs above the 100mb/d mark in 2022, while the supply-side will largely be dependent on OPEC and its allies. The group will decide today on output levels for February. A continuation of the current pact, which is to increase oil output by 400kb/d per month until pre-pandemic levels are achieved, is to be expected. It is however worth noting that even if the group agrees to increase production quotas, realized output might underperform given recent production issues in Libya and Nigeria. 

The National Bank of Poland will probably be the first central bank to raise interest rates this year. The consensus sees it raising its benchmark rate by 50 bps to 2.25% at today’s MPC as it seeks to curb inflation, which is expected to have exceeded 8% y/y in December. Recall that the benchmark rate was just 0.1% in September. 

In the US, the focus will be fully on the ISM Manufacturing report. The headline and the prices paid indexes may grab all attention, but it’s worth keeping an even closer eye on the data and anecdotal evidence on new orders, inventories and deliveries to see whether the demand-driven yet supply chain-constrained environment indeed starts to balance.

The JOLTS report is also up for today. This one doesn’t get much love from investors, as it lags the nonfarm payrolls more than a month, but it really is a treasure trove of labor market data. It is expected that the November figures show that job openings (11.05mn expected) continue to outstrip unemployment (7.4mn), which indicates that the labor market is unusually tight and the unemployment rate is set to decline further.