Exposure rates of the Dorval Asset Management Range – 14th April 2022
With a gain of 1.2% in March, the consumer price index has surged by 8.5% yoy in the US, hitting a 40-year high. However, stripping out food and energy, the rise over the month only came to 0.3% (cf. chart 1). The drop in used car prices (-3.8%), after seeing strong increases over the past two years, points to the beginnings of an easing in the shortages triggered by the Covid crisis. These effects account for a major proportion of the inflationary shock, and their easing could fuel hopes that inflation has hit its peak. This would again lend credence to a soft landing scenario for the US economy, although the path and timing for this easing remain very difficult to project.
Very strong inflation in US in March, but moderation in core inflation
Consumer prices, monthly % changes
Total inflation / Inflation excluding food and energy
The inflation peak scenario would be bolstered by a continued stabilization in commodities prices. Brent prices are still lodged below the $120 mark, despite discussions currently under way on a possible European embargo on Russian oil (cf. chart 2). The slowdown in China resulting from the lockdown in several cities is no doubt playing a role in this stabilization. Additionally, the likelihood of a total European embargo on Russian energy is restricted by concerns of the recession this could trigger, particularly in Germany. Jarring with the conclusions of some other researchers, economic institutes that advise the German government (the “five sages”) expect an embargo on Russian oil and gas to trigger a major recession (-2.2% in 2023, with 400,000 jobs lost). There is therefore a great deal of uncertainty on commodities as no-one knows just what price Europe is willing to pay to apply maximum pressure to Russia.
The scenario of a peak followed by a gradual moderation in inflation in the second half of the year – while still very hypothetical – would clearly be a positive scenario for the equity markets. This scenario would decrease the risk of a recession. However, it does not change the observation that current monetary policy is inadequate, with short-term interest rates well below inflation, despite near full employment. The Fed is thus set to step up policy normalization by hiking interest rates several times by increments of 50bps (or more) and shrinking its balance sheet. Meanwhile the ECB is poised to put an end to its asset purchases over the summer, and could announce the end of negative rates by the end of the year.
In our flexible funds, we maintain near zero bond duration, moderate and highly diversified equity exposure and continue to invest in the energy transition theme. We maintain our hedging against uncertainties in the French elections (buying Bund vs. OAT 10-year).