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This is time to do homework and make money in the next couple of years: Adrian Mowat

Nathan Sheets talks about macro fears and their impact on the US Federal Reserve policy and the markets

May 12, 2022 / 03:42 PM IST
Representative image

Representative image

As inflation in the United States eased slightly in April from the previous month while still remaining close to a 40-year high, Nathan Sheets, Global Chief Economist at Citigroup told CNBC-TV18 that his concern is stagflation.

Speaking during the Bazaar Morning Call segment, Sheets and equity strategist Adrian Mowat discussed macro fears and their impact on the US Federal Reserve policy and the markets.

“I don’t see any slowdown in inflation. There are significant broader issues such as stagflation in the United States,” Sheets said.

Stagflation is a period marked by high inflation, slow economic growth and a steadily high unemployment rate.

Sheets said high and rising goods prices and supply-chain pressures and commodity prices; rise in rent and significant increases in wage that were being passed through services were fanning inflation.

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"These are fuelling inflation and confirms ours and the Fed's resolve," he said.

“We see legitimate risk of recession in the US. While the underlying inflationary pressures are not as entrenched as the 1980s, there are significant broader issues such as stagflation in the country,” Sheets said.

On the Fed’s next move, he said the central bank could hike rates by 50 basis points (bps) for “at least three meetings”. One basis point is one hundredth of a percentage point.

According to Mowat, on the market side, capital markets were discounting the developments "very very rapidly". He, however, said it would be important to see if the macro- environment improves over the next few months. “That's difficult to have a lot of confidence about,” he added.

"The inflation numbers were a disappointment and there's a chance those inflation numbers continue to disappoint in the summer months. Maybe investors will be better to be holding back from buying markets and putting money to work as we come to the mid-third quarter of this year," he said.

On oil prices, Mowat said, "I am quite confident that things like the oil prices will be coming off. There's no discipline anymore in OPEC. Oil is fungible, so even if Europeans don't buy, Russia will. It will find another home."

"I need bond yields to stop rising in the US, we need to see the US dollar rally  stop, and obviously we need to see oil price coming down," were the factors he said would be "looking out for".

"I do see this as a time when you should be doing a lot of homework to make a lot of money in the next couple of years."

Inflation indicators

US consumer price inflation slowed slightly last month, jumping 8.3 percent compared to April 2021, according to data released on May 11.

The annual increase in the consumer price index (CPI) peaked in March at 8.5 percent but slowed in April amid a drop in energy costs, the labour department said.

CPI rose 0.3 percent compared to March, after the 1.2 percent surge in the prior month, but excluding volatile food and energy goods, the index increased 0.6 percent—double the rate in March, the report said.

Gasoline fell 6.1 percent in April compared to March after the 18.3 percent surge in the previous month. But even with the decline in gasoline, energy costs have surged 30.3 percent over the past 12 months, with gasoline up 43.6 percent compared to a year ago.

Still, prices continued to rise last month for a range of goods, including housing, groceries, airline fares and new vehicles, and annual inflation remains at its highest rate since early 1982.

Food at home jumped 10.8 percent over the last 12 months — the largest annual increase since November 1980, according to the report.

The index for meat, poultry, fish and eggs surged 14.3 percent in the biggest gain since May 1979. Americans saw big increases in the month for dairy and cereal products, even as fruit and vegetable costs fell.

Global impact

Oil prices dropped more than 1 percent on May 12 in a volatile week. Benchmark Brent crude futures slipped $1.25, or 1.2 percent, to $106.26 a barrel by 0303 GMT. WTI crude futures fell $1.24, or 1.2 percent, to $104.47 a barrel.

On the centre stage, along with global financial markets, are jitters over rising interest rates, the strongest US dollar in two decades, concerns over inflation and possible recession. Prolonged COVID-19 lockdowns in world's top crude importer China have also impacted the market.

"Those recession concerns are drumming louder and taking oil lower this morning," Howie Lee, an economist at Singapore's Oversea Chinese Banking Corporation told Reuters on May 11.

Watch Nathan Sheets and Adrian Mowat interaction here



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Jocelyn Fernandes
first published: May 12, 2022 12:35 pm
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