US stocks continued to chart big swings, almost on a day-to-day basis, as investors vacillated between fear and greed. Clearly, investors are struggling to assess the fallout from Russia’s invasion of Ukraine — the prospect of prolonged supply and logistics disruptions that are driving prices broadly higher for commodities and the knock-on effect on inflation. Some inflationary pressures will persist for longer — for example, high fertiliser costs will affect future harvests for both human consumption and feedstock — though we think the price increases are also partially being driven by speculative activities. Regardless, rising energy and food prices will result in severe hardship for low-income households, and especially in poorer developing countries.
Unlike during the global financial crisis and Covid-19 pandemic, central banks are now caught between the need to tamp inflation, by raising interest rates and pulling back on massive QE (quantitative easing) programmes, and keeping monetary policies sufficiently loose to support the economy, amid rising risks to growth. A case in point: The European Central Bank accelerated plans to end its long-running asset buying programme, by 3Q2022, widely seen as a prelude to higher interest rates. The US Federal Reserve raised its short-term policy rate by 25 basis points last week, and has pledged to tackle inflation more aggressively, if necessary.
That said, monetary policies remain very accommodative and liquidity is ample from a long-term historical point of view. Meanwhile, households and corporates in the developed world have emerged from the pandemic with excess savings and solid balance sheets.