Investability bulletin 23/04/22: Taxing Times

The Chancellor needs to pull several rabbits out of his hat at the Spring Statement

Inflation in the UK rose to a 30-year high of 6.2% in the 12 months to February, up from +5.5% in January. The Bank of England expects it to top 8% this spring. Prices are soaring, living standards are dwindling; CBI’s output price expectations rose to +80 vs +77 in February, the highest since records began in 1975. 

Rishi Sunak has a difficult job to ease things, if he were to be so inclined, with today’s Spring Statement. We don’t really know if he cares that much – only enough to get re-elected perhaps. Millionaires married to billionaires are not ‘men of the people’ and have little feel for what it’s like to be poor. They don’t get that a few hundred pounds could make all the difference – abandoning the NI rise would be the best strategy, whilst Universal Credit must surely rise. 

It would also be beyond comprehension if the soaring cost of fuel and household energy weren’t addressed…perhaps a cut to fuel duty (and the 20% VAT also charged on petrol and diesel) and removing the “unfair and damaging” 5% VAT on energy bills, as Boris Johnson and Michael Gove described it when promising they’d scrap it during their Brexit campaigning. With all the talk of a windfall tax on oil company profits, it’s easily forgotten that the Treasury has enjoyed a tax windfall from rising fuel prices paid for by the consumer – time to give it back, or come up with some more creative plans to simultaneously address environmental and poverty issues (I’m not holding my breath).  

Mr Sunak has an extra £35bn to play with and the jump in inflation underscores the urgency to act. The Spring Statement is not the Budget, but it’s a set-piece event for the chancellor and the cost-of-living crisis is upon us now. Sterling has continued its advance from the 1.3160 against the dollar, rising clear of 1.3250 this morning but finding resistance at 1.33 where it turned lower. 10yr gilts yield about 1.7%, the highest in almost 4 years. More on the spring statement later.

Stocks continue to grind higher – coming to terms with inflation, rising yields and the war in Ukraine? Or maybe just driven by retail suckers, buybacks and hedges rolling off? BofA says inflows last week were corporate buyback driven. Hedge funds (3rd straight week), Institutional (1st time in 4 weeks) and Retail (1st time this year) were all net sellers. 

The Dallas Fed warned that if the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn “seems unavoidable”. This slowdown could be more protracted than that in 1991, the researchers say. Oil prices are towards the top of the recent range, with Brent at $117, having run into resistance at $119.50 yesterday. Talks between Ukraine and Russia continue but so far little progress; Russia is going for brute force but it’s clear it’s unable to win the war.

The Fed’s James Bullard is really going hawkish, saying the 1994 cycle is the most appropriate comparison to today – implying 300bps of hikes. Fed funds probabilities now showing back-to-back 50bps hikes so hard for any further hawkish surprises from the Fed from here until June. Euro area is harder to read – Germany saying it will spend to drive growth and avoid stagflation, the ECB’s De Guindos says no risk of stagflation… 

Yields…US 10s topped 2.4%, heading towards snapping a 40-year downtrend. US Treasuries have had their third worst drawdown in a century. Fed chair Jay Powell and Bank of England governor Andrew Bailey are both due to speak today.

Cathie Wood sells out of DocuSign…which makes you wonder if these are really disruptors wouldn’t you, in crypto parlance, HODL?  

Gamestop surging in pre-mkt by around 12% as a filing showed chairman Ryan Cohen has been filling his boots with the stock.

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