Market Update - Has Inflation Peaked?!
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The bedrock of the current macroeconomic conditions we are enduring is inflation, in all its expressions across different scoreboards, and reserve banks globally who have a mandate to keep inflation in healthy territory have unfavorably seen their respective inflation numbers break above the upper bounds of target inflation rates. Locally, we are sitting at 7.4% (stretching further above the 6% upper bracket), and both the Europe zone as well as the US are experiencing aggressive 8.9% and 9.1% respective rates ,far above the 2% rate these zones target. This is the common thread globally, and an overwhelming lot of reserve banks are tightening monetary policy by increasing interest rates in an attempt to destruct demand and reduce inflation. As we recall that higher interest rates have the effect of incentivising saving while punishing borrowing, ultimately reducing the amount of money chasing goods and services. This climate has not been good for asset prices, and the sentiment is such that; once the expectation that inflation has peaked is mature, market players tend to be optimistic and buyers drive the narrative of pricing.
Today at a glance.
Has inflation peaked ? - looking at the bond, equity and crypto markets for clues.
On the money :
Coinbase partners with BlackRock.
Funding in Africa start - ups is still looking healthy amidst global contractions .
PWC reports show Mergers and Acquisitions, and IPO’s slowed down this year.
Has inflation peaked ? - looking at the bond, equity and crypto markets for clues.
The relationship between inflation - bonds - equities - and alternative assets (i.e crypto assets) has been seen play out at its peak in this market cycle. As you would recall, bonds are debt instruments that allow investors to lend (invest) an institution a sum of money, in return for fixed periodical payments for a certain period till maturity of the bond, where the investor then receives back their initial investment.
Considering that bonds return a fixed return, holders of bonds are very sensitive to both current and expected inflation as it affects the purchasing power of the bond returns ,and ultimately this affects the going price of bonds ,and yield thereof in the market. In the current macroeconomic conditions, where we’re enduring burning inflation, bonds have been sold off aggressively , increasing bond yields, which are a key fundamental in how equities are valued. The relationship between bond yields and equities is negatively correlated, such that when bond yields increase, equity valuations decrease, and vice versa, considering that markets are so efficient, they price in current and expected conditions. (See more on this relationship) We see this relationship play out in real time in the market, with minimal lag.
As reserve banks went on their latest hike of interest rates (of many we’ve seen this year), the market priced in an expectation that inflation had peaked, and would soon start dropping. This expectation was priced into the bond market of late where bonds have been bought more than sold - off , as a result driving bond prices up antagonistically slowing down yields ( from 21 July) as visible on the graph below.
Noting that the bond market is sensitive to inflation, bond buyers would only start loading up bonds into their portfolios on the expectation that inflation has peaked or is close to peaking and would only slow down thereafter.
Slower bond yields have been an optimistic signal for the equity market and crypto (using bitcoin as a proxy), considering that equity markets have been highly correlated to bitcoin of late.
Whether or not inflation has peaked is a debatable topic, but the market seems to be pricing in an inflation peak.
Has inflation really peaked though ?!
Without making the subtle insinuation that the market could be wrong, hence requiring validation, looking at commodities, which the previous edition entailed why I believe they are the driving force of inflation (supply side, rather than demand, which has also been hot), the index (commodities index) which tracks the prices of 19 key commodities, is showing signs of slowing down, and it is least to mention that the supply of some commodities affected by Russia - Ukraine war has resumed and been availed to the global market through an agreement between both countries to allow movement (through the Black Sea) of wheat, maize, sunflower seed and other grains. Russia agreed not to attack grain vessels, which could restore the grain trade in the Black Sea region.
Whether this (better supply) in combination with tighter monetary policy (lower demand) is a sign for a peak in inflation, it is yet to be seen, and only time will tell, and as much as the market could be in the very short term, pricing in an inflation peak, I am starting to be wary of macroeconomic predictions, mainly because of socio - political variables (one cannot predict) that largely influence macro - economics, and underwhlemnly also, considering the ‘lucretius mental error’ one can make when looking at future macroeconomic conditions, even stress tested against different socio - political scenarios, it is not the most valuable thing to do.
The Lucretius Problem is a mental defect where we assume the worst-case event that has happened is the worst-case event that can happen. In so doing, we fail to understand that the worst event that has happened in the past surpassed the worst event that came before it.
On the money - events I had my eyes on.
Coinbase partners with BlackRock
+- $10 trillion asset under management firm partnered up with Coinbase to offer its clients crypto trading and custody via Coinbase Prime. Read more
Funding in Africa start - ups is still looking healthy amidst global contractions
PWC reports show Mergers and Acquisitions, and IPO’s slowed down this year.
The PWC reports show that mergers and accqusitions, and the public listing for public trade of private companies accross the globe have slowed down due to current market conditions.
Talk to you soon,
-Kusa Nkosi.