The 2-year rate increased by more than 10 basis points to 3.1535%, hitting its highest level since 2007. The benchmark 10-year Treasury yield was also up, trading at around 3.1762%.
This week, a highly anticipated Federal Reserve meeting will be held, with the US central bank likely to announce at least a half-point rate hike on Wednesday. The Federal Reserve has already upped rates on two occasions this year, including a 0.5 percentage point increase in May in a bid to stave off surging inflation.
Last week, it was reported that the US consumer price index was up 8.6% in May on a year-over-year basis. This is its fastest jump since 1981, according to the Bureau of Labor Statistics.
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On a monthly basis, headline consumer price index (CPI) was up 1% while core increased by 0.6%. Estimates had been 0.7% and 0.5% respectively.
Surging fuel prices, food prices, and housing costs all contributed to the record-high jump.
Energy prices broadly increased 3.9% from a month ago, bringing the annual gain up to 34.6%. Housing costs rose 0.6%, the fastest one-month gain since March 2004. Food costs, meanwhile, jumped another 1.2% in May, taking the year-over-year gain up to 10.1%.
“What we need to see is clear and convincing evidence that inflation pressures are abating and inflation is coming down — and if we don’t see that, then we’ll have to consider moving more aggressively,” Chair of the Federal Reserve Jerome Powell told the Wall Street Journal last month.
“If we do see that, then we can consider moving to a slower pace.”
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This is why the success witnessed in the UK property market was quite special. The resilience of the market saw investors presumably looking to cash in on assets that have been historically reliable during a time when other opportunities haven’t looked as stable. Clearly, when looking at recent figures, this isn’t slowing down, with houses selling faster than ever, twice as quickly as they did in 2019, according to Rightmove’s house price index.
This boost in market activity is coupled with the surge in rising house prices recorded across each of the major recognised UK house price indices. For example, Nationwide's April house price index revealed that average property prices have now reached £267,620, the ninth straight month of growth.
Of course, this should not encourage complacency – the property market is not impervious to market volatility, particularly in the face of rising inflation and a cost-of-living crisis.
That said, with all Covid restrictions coming to an end at the beginning of the year, the health of the market is set to receive a significant boost in the form of international investors keen to take advantage of the freedoms not as readily available in previous years.
What is the role of international investment?
Attracting non-domestic investment will be vital. Not just to maintain the current growth of the market once domestic activity begins to lose momentum, but to help with the country’s economic recovery.
Fortunately, this appears to be the case since the reopening of travel into the UK. According to Knight Frank’s City Wealth Index section of their 2022 Wealth Report, in 2021, London saw more cross-border private capital in real estate than any other city in the world, with over $3 billion invested. Their forecasts estimate this trend to continue over 2022, with a further $24 billion expected to be invested in the capital.
The demand is certainly here for international investments when considering the UK’s housing crisis as the country desperately needs to address the chronic shortage in housing. According to one estimate commissioned by the National Housing Federation (NHF) and Crisis from Heriot-Watt University, around 340,000 new homes need to be supplied in England each year, of which 145,000 should be affordable. However, only 216,000 new homes were supplied in 2020/2021.
International investors have the potential to play a key role in supporting the construction and development sectors by buying new residential units off-plan and funding development schemes, particularly at a time when the knock-on effects of the pandemic have contributed to the slowdown of construction.
As such, they have the potential to achieve strong returns, especially when investing in growing areas. Regional areas outside of London, such as the West Midlands and North of England, are also very much on investors’ radars and will be ones to watch as they continue to gather pace in the years to come.
Could current macroeconomic headwinds slow down international investment?
Despite the promising signs, one must also acknowledge that the macroeconomic headwinds at play could impact the pace of growth.
For one, interest rates have continued climbing, having recently risen to 1%. Usually seen as a negative headwind for property investors, increased base rates tend to be followed by a rise in mortgages. Any overseas investors already operating on a variable term mortgage will see rates rising, while those considering taking a new one out to purchase UK property will have to factor in higher mortgage rates than they would have experienced last year.
Of course, the reason the Bank of England has increased interest rates is to control soaring inflation; another potential concern for the investors. Prices are set to rise to 10% this year – the highest rate for 40 years alongside increased energy bills and goods prices. A combination of high interest and inflation could erode rental returns and devalue the property if house price growth slows. Not to mention the consequent cost-of-living crisis brought on by raised costs has an indirect effect, as tenants could struggle to afford rents.
However, with all this said, international investment in the UK is unlikely to falter when the demand for new property is so high. Meanwhile, the drop in the pound since the UK’s withdrawal from the EU means that favourable exchange rates will see investors’ money stretch further.
With so much economic uncertainty off the back of a, to put it lightly, challenging two years, it is more important now than ever that we take full advantage of international investment flows. Harnessing the potential of this vital resource will be key to ensuring the continued healthy growth of the industry, the creation of new homes, and the wider economy in general, as we look to put recent times behind us.
About the author: Jamie Johnson is the CEO of FJP Investment, an introducer of UK and overseas property-based investments to a global audience of high net-worth and sophisticated investors, institutions as well as family offices. Founded in 2013, the business also partners with developers in order to provide them with a readily accessible source of funding for their development projects.
In 2008 Central Banks bailed out the financial universe following the collapse of Lehman. They provided unlimited liquidity in the form of Quantitative Easing and Negative Interest Rate Policy to dodge a global recession and enable the longest bull market on record. In 2012 the ECB saved the Euro and Europe by doing “whatever” it took. In 2020 central banks stepped in to stabilise wobbling COVID struck economies with rate cuts and yet more liquidity.
Today? Central Banks are being assaulted on every front. Politicians are questioning their independence – blaming them for the effects of the sudden Ukraine War Energy and Food inflation spike. Markets are watching the bull market unravel and blaming Central Banks. Read any research on the market and it will cite “Central Bank policy mistakes” as the most likely trigger for recession, stagflation, and market collapse.
Financial professionals under the age of 40 have never known normal markets. They’ve learnt their trades in markets where Central Banks are expected to step in a stabilise markets, to prop up too-big-to-fail financial institutions, and keep interest rates artificially low, thus juicing markets ever higher. I reckon over half the market workforce – fund managers, bankers, traders and regulators – will never have encountered market conditions like those we’re about to experience as it all goes horribly and predictably wrong.
Thankfully, there are few old dogs like me still wagging our tails in markets. We’ve seen it all before. Proper market crashes, interest rates in double digits, mortgage rates that will make a millennial’s heart tremble, and inflation the likes of which we are now seeing again. But, even we don’t know what happens next. This time… it is different.
We can’t blame Central Banks for the war in Ukraine – that’s a classic exogenous shock. It’s a crisis the politicians really should have figured out, foreseen and prepared for. One of the prime duties of the state is security, and it’s the insecurity of energy and soon, food supplies, that have triggered the inflation shock.
The reality is exogenous shocks outwith central bank control have precipitated inflation in the real economy. But, let’s not kid ourselves: two factors successfully hid inflation for the last 12 years:
- Most of the liquidity injected by central banks since 2008 flowed into financial assets (stocks and bonds), where price inflation was mistaken for investment genius. (It’s also generated massive wealth inequality between those that own stocks and those that don’t.)
- In the wake of COVID, supply chains have unravelled. The Geopolitical Tensions now apparent between the West and China mean the end of the age of globalisation – and it was cheap Chinese exports that created the deflation that kept inflation artificially low during the twenty-teens.
In retrospect, the whole bull market of the Twenty-Teens looks increasingly false – a Potemkin village boom founded on overly cheap money, government borrowing and undelivered political promises. Abundant liquidity enabled the age of the fantastical – growth stocks worth trillions but profits measured in pennies, crypto-cons, SPACs and NFTs. Booming markets supported by accommodative central banks have spawned a host of consequences – few of which will prove ultimately positive.
Central Banks knew the risks from the get-go. They have been trying to figure out how to undo (or taper) the consequences of their monetary stimulus while maintaining the market stability critical for Western Economies. That has all suddenly unravelled at speed because of the inflation shock.
It’s the decisions taken over the past 14 years by Central Banks have led us to this critical moment in economic history. Since 2008 central banks have been using monetary experimentation to stabilise and control the economy and markets. And, as always happens, suddenly it’s turned chaotic. Its only now becoming apparent just how much these policies created massive market distortions, overturned the traditional investment narrative and caused the most massive misallocations of capital in global financial history at both the Macro and Micro levels.
Oops.
Take a look at markets over the past 14 years and figure it out:
- The most speculative asset bubbles in history?
- Tremendous financial asset inflation on the back of ultra-low interest rates?
- Whole new financial markets like cryptocurrencies and NFTs emerging on the back of the broken monetary model – which will likely prove absolutely hollow scams.
- And the power of FOMO (Fear of Missing Out) dragging in millions of inexperienced retail investors to meme stocks – where they are now likely to be skinned and gutted?
Oops again…
How did it go so wrong? The Global Financial Crisis of 2008 threatened a global depression. The problems were multiple – a dearth of bank lending (caused as much by draconian new capital regulations as risk aversion), economic slowdown, and incipient recession… Central banks were forced to act, and flooded the economy with liquidity in the hope it would stimulate growth.
It didn’t. It created market bubbles. Investors quickly realised the easiest way to generate returns was to follow liquidity. Corporate managements figured out the best way to improve their bonuses was to inflate their companies' stock price – not through carefully considered investment in new plants and products to improve productivity and profits, but by borrowing money in the bond markets to buy back their own stock. And that’s worked well…Not! All that money has now been lost by crashing markets, and they still have to repay the debt.
Again… Oops…
In Europe the 2012 sovereign debt crisis followed the banking crisis, triggering massive fears of imminent country defaults and the Greek debt crisis. The ECB did what it took and used monetary policy to advance billions to banks through Targets Long-Term Repos and other emergency measures… Very quickly banks and the market realised central bank liquidity was an arbitrage opportunity – if the Banks were buying bonds, buy more bonds to sell to them!
As a result, nations like Italy saw the cost of their debt plunge, allowing some of the most heavily indebted nations to continue borrowing… Yet there is no guarantee, and never will be, that German taxpayers will ever agree to pay Italian pensions. As the German terror of hyperinflation is raised, and Europe suffers stagflation, it's highly likely we will see new tensions across European debt arise. That’s why it’s a politician rather than a central banker running the ECB!
Guess what… Oops…
How did the Central Banks intend to undo the consequences of the distortion they created? Taper? Hah. We are passed that stage now. I guess we will never know how they planned to untie the knot they created...
The good news is chaos spells opportunity for smart investors!
The drop has sent the retailer’s shares down 2%.
Across the board, companies in the United States have been struggling with higher costs due to supply chain disruptions, worsened by the ongoing conflict in Ukraine and renewed Covid-19 lockdowns in China.
Costco plans to up prices in certain areas to combat record-high inflation. But, despite this challenge, the retailer still succeeded in posting quarterly profit and revenue that topped estimates. In the quarter which ended May 8, Costco’s total revenue increased 16% to $52.60 billion, compared with estimates of $51.71 billion.
Additionally, Costco’s efforts to keep gas prices several cents lower than the national average have boosted sales and memberships.
The last time inflation was this high – in the early 1980s – Margaret Thatcher had been prime minister for two years. Channel 4 had just launched, and if you were aware of inflation at all, it was probably because the Wham! cassette you wanted to buy at HMV was a pound more than you expected.
Since then, inflation has rarely exceeded 4%. Generations of British and European finance professionals have spent whole careers making forecasts – where inputs and outputs were relatively stable most of the time. But that’s over now. Today, with Sterling and Euro zones’ inflation already running above 7.5% and no cooling in sight, monetary stability seems to be something else we lost during the pandemic – and adapting to this new reality is now a concern for chief financial officers (CFOs) and finance transformation leaders.
What should you keep in mind?
This is a crisis with your name on it
The 2020s aren’t the 1970s reloaded. For CFOs and other finance leaders, managing this round of inflationary times is likely to be even more challenging.
The reason is that today’s CFOs have a broader mandate to help shape corporate strategy, supply chain resilience, pricing and procurement, as well as maintain a keen interest in the level of staff attrition in the business. As a finance leader, you may well be positioned to understand what is happening, but have you considered how finance should partner differently with the rest of the business?
Inflation is a five-alarm fire
Inflation will affect your firm, your employees, and your shareholders – but not everybody will be attuned to the dangers, and many may be underestimating the toxic effect of stagflation (i.e., inflation without growth). Your first job will be to convince everyone that mitigating its impact is a high priority. Unless your financial modelling capabilities are ready to simulate the limit of passing on any price increase to customers and contain input price hikes, inflation may not just hurt margins for a quarter or two, it may hurt your company’s profits and prospects longer term. Whether the challenge is procurement, outsourcing, pricing or hiring, you need a finance transformation and continuous improvement strategy, and that strategy should be executed based on proven best practices.
Prices and costs are moving targets
The costs of labour, materials, transportation, energy and other expenses are all increasing, but not necessarily at the same rate. To handle inflation, you will need a deep sense of the moving parts of your cost structure – particularly if a period of stagflation ensues and the growth slowdown limits your ability to raise prices. Enterprise-wide, too, it’s important to remember that inflation affects different businesses differently. Organisations in the hospitality business may be very concerned with foreign exchange risk, while industrial manufacturing organisations will likely be worrying more about the cost of raw materials and logistics. It goes without saying, of course, that working capital management will need even more emphasis. If you need to cut costs, do it intelligently. Benchmark your costs to look for opportunities and take another look at the benefits of digital transformation, which many companies today are finding to be a highly effective way to scale capabilities while reducing expenses.
The most valuable people in your team may be revising their CVs
In a very real way, inflation is a pay cut for your staff. If you don’t make it worth their while to stay, your best employees will leave. Keep this in mind as you draw up your own hiring and retention plan. Replacing finance professionals will be expensive, particularly because for many firms, proactive inflation management will require hiring more analysts. The shortage may turn out to be quite serious: we know of one company that is expanding its planning and analysis team by 40% and doubling its indirect sourcing and procurement staff so it can handle the added workload generated by additional price and cost modelling and more frequent contract reviews.
Refocusing the services of the finance business partners becomes paramount
Unfortunately, for many finance organisations, the activities of the finance business partners supporting management decisions may still be consumed by the wrong types of activities and priorities. High-performing organisations are instead revisiting the role that finance should play to help adapt the enterprise to this new reality, focusing on important questions: What is the breaking point where price increases begin to adversely impact demand across your products, services and channels? How much inventory are you willing to carry as warehousing costs increase? What is your exposure to rising interest rate differentials? How do you balance working capital management with the need to satisfy customer demands? What is your optimum cash position to take advantage of discount opportunities? What is your supplier credit risk? Do you understand the working capital drag created by the increasing cost of capital on our overall profitability?
The increasingly strategic role that the finance function plays in high-performing companies over the last decade gives legitimacy to the evolving role of finance. For instance, we foresee an enduring role for finance professionals in educating and coaching other leaders in navigating this challenging environment. This role will be supported by the unmatched analytic insight – an understanding of how the company’s value chain fits together, including research and development, commercial operations, and other enabling functions. As challenging as the rest of the 2020s may be for the prepared finance executive, they are also likely to be years of extraordinary opportunity.
About the author: Gilles Bonelli is an Associate Principal at The Hackett Group’s Finance, Enterprise Performance and Business Intelligence Advisory Practice in Europe.
Mid-week, investors wiped nearly 25% off Target shares after its profit halved. Meanwhile, Walmart was down 1.3% on Thursday after already falling more than 17% in the two sessions after it announced poor results on Tuesday.
Target’s earnings revealed consumers have been spending more on food and household essentials but cutting back on high-margin items. Meanwhile, Walmart’s earnings revealed consumers had moved to buy lower-margin basics.
On Tuesday, Federal Reserve Chair Jerome Powell pledged the US central bank would rise interest rates as high as necessary to combat spiralling inflation.
"We think the developing impact on retail spending as inflation outpaces wages for even longer than people might have expected is a principal factor in causing the market sell-off today," commented Paul Christopher, head of global market strategy at Wells Fargo Investment Institute. "Retailers are starting to reveal the impact of eroding consumer purchasing power."
The Bank of England is tasked with creating inflation every year. Inflation erodes the value of money – prices rise – and our wages don’t always keep up with the cost of living. So who benefits from this policy and who pays? We know who pays for inflation. It’s the young people saving for a deposit who have those savings eroded, while first home prices are pushed further out of reach. House prices in the UK have benefited from dramatic inflation over the past fifty years and this has meant more and more people are left behind. What’s more, rents are going up and, right now, household bills are going ballistic. Inflation drives the abject misery of ‘heating or eating’.
Who benefits from rising inflation?
Governments tend to favour inflation as it erodes the real cost of repaying government debt; the warfare and welfare won’t cost quite so much to pay for if we inflate the debt away. Inflation can work as a stealth tax, by freezing a tax band so that more people must pay at that rate of tax. It can also be a stealthy way of reducing current expenditure; nurses get a rise, but not by quite as much as the real inflation rate.
Those of us who own houses and other assets quietly know that we are at least protected from inflation. In fact, our house prices always seem to go up by more than the official rate of inflation. The property guys see their rents increasing, with the value of their buildings increasing too and the real value of what they owe the bank falling. Property is a good gig. Inflation works for the banks as well. They can lend more against rising property values and are protected should they ever need to rely on the value of their security. Banking is a good gig too. Is there an inherent problem that the Bank of England should preside over a policy that seems to suit its industry?
Inflation is the ultimate regressive tax
Inflation takes money from poorer people and transfers it to those with wealth, as well as to the government. It enables governments to behave irresponsibly in relation to running up debts. In enacting this policy and indeed in letting inflation get completely out of hand, the Bank of England is behaving as a latter-day Sheriff of Nottingham.
Moreover, the Bank of England is uniquely well placed amongst central banks to start getting a grip on inflation. Through quantitative easing and suppressing interest rates, the bank has helped keep the Sterling at its lowest sustained value since the founding of the bank. In such a free trading country as the UK – where we import much of the products we use – an improvement in our exchange rate against other major currencies would have the immediate impact of reducing inflation.
The fact that the Bank has operated such a loose monetary policy in a period when the UK economy has been growing reasonably well and has record levels of employment is extraordinary.
It is almost as if the bank is trying to wilfully exceed its inflationary remit.
We are so used to inflation in our lives that it is easy to forget that it has not always been like this. In the 100 years between the battle of Waterloo and the outbreak of WW1 the pound gained about 5% in value. This marginal deflation is perhaps not surprising given the extraordinary advancement in technology and spread in trade that enabled many items in the shopping basket to become cheaper. As always, for most people, the largest item in that basket was the rent or purchase of their home. The Victorians managed to reduce the cost of an average home from 14 times the average household income at the beginning of the 19th Century to three times by the end.
By contrast, in the 100+ years since the outbreak of WW1 - rather than gaining in value - the pound lost over 95% of its value. Where a pound would buy 20 loaves of bread in 1914, it now doesn’t buy one. Average house prices are back at nearly 10 times average household incomes. The Victorians would have been proud of our amazing technological innovation and increase in trade. They would have been horrified at how we have allowed much of the social benefit of economic success to be eaten away by inflation. That inflation is a government policy is shameful. That inflationary policy has been allowed to get completely out of hand is criminal.
Inflation got going in the West as a by-product of paying for the two world wars and later for the Vietnam war. It became a policy of governments as it suits their desire for us to live beyond our means. It simultaneously suited financiers and property people too. A strange marriage of the state and capital that normally appear to be opposites in our society.
Final thoughts
I am not so sure the Bank of England shouldn’t be tasked with a policy of deflation. House prices would become more affordable for Millennials and Gen Z. This could help reverse a long-running decline in homeownership. Rents might fall. A policy to undo some inflation would be novel. Who would benefit and who would pay?
About the author: Sebastian Chambers is the author of The A-Z of Inequality, published by White Fox, priced at £10.00 and available at Amazon.co.uk.
As National Small Business Week (May 1-7) gets underway, GreenDayOnline, an online lending platform that offers same day $255 loans, presents three critical investing tips to assist small business owners in weathering the current economic storm.
1. Utilise technological advancements in order to reduce or completely remove the need for additional services
It is possible that using technology to lower fixed expenses will result in the generation of dividends in the medium to long term (for example, digital record keeping or automated revenue management systems to expedite data entry and billing).
2. Market to customers who are already loyal in order to keep them that way
Despite the fact that the cost of new customer acquisition is significant, it is necessary because loyal customers can be relied upon to keep revenue streams continuous and profitability stable throughout time, regardless of the state of the economy. When it comes to generating repeat business, establishing a client loyalty program is one of the most effective strategies available. The provision of discounts to repeat customers, reward programs for frequent customers, or any other sort of advantage in exchange for a membership fee are examples of how this can be accomplished. Customers that participate in these types of programs have a higher likelihood of remaining loyal to a company, which reduces the amount of money that firms would otherwise spend on advertising and recruiting new customers to their products and services.
3. Purchasing in large quantities in order to save money on per-unit prices 3
Whenever a firm operates in an inflationary environment, the expenditures made today by the business are worth more than the expenditures made tomorrow by the same business. This is feasible through the purchase of vast amounts of goods and services. Using this method is acceptable during years of low inflation, but it is extraordinary during periods of high inflation, as the following chart illustrates.
It may sound odd at first, but GreenDayOnline website president and co-founder Tarquin Nemec explained in a business press release that "spending more to save more" is a strategy that the company employs. "However, it is effective," he went on to say. Business owners who adopt a long-term perspective and make prudent investment decisions now to assist reduce long-term expenses will be the ones who gain in the long run, according to the authors.
Recently released economic numbers demonstrate that inflation is continuing to grow at an unprecedented rate, which is unprecedented in recent history. The Bureau of Labor Statistics reported an increase in consumer prices of 8.5% in April, bringing consumer prices to their highest level in 40 years at the time. Businesses and government entities are also experiencing the effects of the recession.
The National Federation of Independent Business (NFIB) conducted a poll last week in which it found that more than 90% of small businesses stated that inflation was having an impact on their operations in some form, with 62% reporting that it had a "significant impact." In addition, the poll indicated that 68% of those who replied stated that they "intend to raise average selling prices in the next three months," according to the findings.
A record-breaking 5.4 million new company applications were filed in 2018, according to the United States Census Bureau, shattering the previous year's prior high of 5.1 million applications filed the year before.
According to the most recent data from the Office for National Statistics (ONS) on Wednesday, the consumer price index (CPI) measure of inflation rose to 9%, the highest it's been since calculations began in 1997. Additionally, the ONS estimates that CPI hasn’t been higher since 1982 when it peaked at around 11%. This is up from a 30-year high of 7% seen in March.
Chancellor of the Exchequer Rishi Sunak commented, "Countries around the world are dealing with rising inflation. Today’s inflation numbers are driven by the energy price cap rise in April, which in turn is driven by higher global energy prices.”
"We cannot protect people completely from these global challenges but are providing significant support where we can, and stand ready to take further action," the chancellor continued.
“In fact, the administration tried hard to inject even more stimulus into an already over-heated, inflationary economy and only Manchin saved them from themselves,” Bezos Tweeted. “Inflation is a regressive tax that most hurts the least affluent. Misdirection doesn’t help the country.”
Bezos’ comments come in response to a thread in which President Biden claimed the US was on track for its largest yearly deficit decline ever, totalling $1.5 trillion.
Bezos called the President out over a tweet that said taxing wealthy companies has the potential to bring down inflation and urged the Disinformation Board to review the President’s tweet.
“Raising corp taxes is fine to discuss,” Bezos said on Friday. “Taming inflation is critical to discuss. Mushing them together is just misdirection.”
The fall marks its lowest point in two weeks as the demand outlook was pressured by increasing recession risks and Covid-19 lockdowns in China. Additionally, a strong US dollar made crude oil more costly for buyers purchasing in other currencies.
US West Texas Intermediate crude oil was down 3.2% to $99.76 a barrel, while Brent crude dropped 3.28% to $102.46 a barrel.
Also on Tuesday, French President Emmanuel Macron and Hungarian Prime Minister Viktor Orban discussed energy security amid EU efforts to persuade Hungary to agree to proposed sanctions on oil imports from Russia.
"These are volatile times, the daily price bars are outsized these days," commented John Kilduff, a partner at Again Capital LLC. "As the EU continues to dither over whether or not they are going to embargo Russian oil, that changes the calculus very much as well in both directions.”
