What should chicken farmers do? Save money by stopping production but risk having no business? Grin and bear it in the hope of eventually passing on the increased cost to retailers who themselves are labouring under wafer-thin, low single-digit operating margins and their own business cost pressures? Innovate? How many more uses for an egg are there that have not been found already? Diversify, with all the associated risk?
The US inflation rate for April was reported at 8.3%, marginally down from 8.5% in March but down by far less than analysts had been expecting, particularly with the sharp reduction in the price of crude oil over the past month since the hiatus when the UK and the US announced oil sanctions against Russia. Markets are still grappling with the possibility that inflation may prove more enduring and embedded than anticipated. As much as anything, it will be wages which are likely to be the factor which determines that duration; raw materials and energy prices are cyclical and volatile (which by implication means they go down as well as up, as illustrated above), while nominal wages tend not to fall, albeit P&O found a blunt and not very successful solution to that problem when it fired 800 seagoing staff and tried to replace them with workers on lower wages.
On the liquidity front, effective 1st June and for three months the Fed will allow maturing bonds to roll off its balance sheet without being refinanced (that projected run-rate is $47.5bn a month, $30bn of which is government bonds and the rest are mortgage-backed securities); from September it will begin proper quantitative tightening (QT), meaning it will actively sell securities back to the markets. The monthly sums will be capped at $60bn per month for government bonds and $35bn for mortgage-backed securities. In context, the total Federal Reserve balance sheet is still just shy of $9 trillion, having been $4 trillion immediately before the pandemic, and a mere $400 billion before the Global Financial Crisis when quantitative easing (QE) was but a twinkle in its creator’s eye. \
We have said before that the European Central Bank (ECB) remains the one to be smoked out of its bunker, a long way behind the policy curve of its UK and US colleagues. But even Christine Lagarde has finally capitulated and announced that ECB interest rates will probably rise in July, having already twice retreated from indefensible positions when her target dates of the end of the year and the third quarter were successively routed. But if all are roughly now on the same page on the path from QE to QT, it’s a ‘Goldilocks and the three bears’ menu of policy porridge: the US response is hot, the UK warm-ish and the eurozone distinctly tepid, perhaps not surprising when hosting a major war on its doorstep. After over a decade of central banks being the markets’ friends, investors have now been cut adrift, left to sink or swim according to their own devices.
Markets are inherently forward-looking, constantly scanning the horizon for factors which change the outlook rather than being preoccupied with what is already regarded as ancient history, however recent it might be (although reported data is an important sense-check on the journey).
In that respect, while the headlines focus on inflation, investors are already divining from the chicken’s entrails that with global growth slowing, the future risk is less about inflation itself and more about whether in tackling it, the central banks tip the economy over the edge. In the minutes of its recent policy meeting, the Federal Reserve referred to recessionary risk but that it hoped to engineer a “soft landing”. Such an ambition is neither delusional, nor is it deliverable on demand: if that were the case, given major Western economies are supposed to be managed to a target inflation rate of 2%, we would not be sitting with current inflation at four times the mandated rate. Central banks can influence outcomes, but they certainly do not control them.
There are empirical pointers supporting market opinions that the threat (rather than the reality) of a prolonged dose of policy medicine is already working. The US autos market has outstanding finance liabilities at a record high of $1.3 trillion, while in the past quarter the volume of new car sales has plummeted year-on-year by 15% for used cars and 16% for new ones, the latter exacerbated by the chronic shortage of components, semi-conductors in particular. With unsupportable gratuitous price inflation for vehicles and rapidly escalating financing costs, those sliding volumes suggest the steam is coming out of the market. In housing, the new 30-year mortgage rate is offered at 5.4% compared with 3.1% a year ago which most see as causing a slowdown in new house sales.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
The value of active minds – independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.