S&P GLOBAL — 11 Feb, 2022 — Global

Daily Update: February 11,

2022
! 

Author S&P Global

Tags Global

Start every business day with our analyses of the most pressing developments
affecting markets today, alongside a curated selection of our latest and most
important insights on the global economy.

With U.S. inflation at the highest level in four decades, what will the year ahead
look like for global markets against a backdrop of evolving monetary policy and the
continuing pandemic?

Consumer prices in the U.S. swelled 7.5% in January from a year earlier—more
than the consensus estimate of 7.2% and the highest recorded since 1982—and
0.6% on a monthly basis, according to Consumer Price Index data released
 yesterday. Such conditions are likely to put additional pressure on the Federal
Reserve and other central banks around the world to get inflation under control.

While many companies have pushed higher prices onto their customers and
consumers, inflation is a top concern for many. Mentions of inflation-related
words appeared in 71% of fourth quarter 2021 earnings calls, a notable increase
from 39.2% a year earlier, according to an S&P Global Market Intelligence’s
analysis of earnings call transcripts from S&P Capital IQ.

“The U.S. Consumer Price Index, both total and core, each surged by 0.6% in
January on a monthly basis, beating market expectations yet again. On a year-over-
year basis, both total and core reached their highest rates since 1982, when Paul
Volker was the chairman of the Federal Open Market Committee,” S&P Global
Ratings Chief U.S. Economist Beth Ann Bovino told the S&P Global Daily Update.
“These explosive price gains make a 25-basis-point (bps) March rate increase
almost a slam dunk, and the possibility of a 50-bps rate hike this year increasingly
likely.”

S&P Global Economics expects the U.S. central bank to

raise interest rates six times this year, starting in March, followed by an additional
five in 2023-2024. Emerging market economies, which have experienced
turbulence during Fed tightening cycles, appear
better-positioned to weather changing conditions than they were in previous
cycles. The Bank of England has already raised rates twice, and the European
Central Bank could in March begin preparing markets for its monetary policy
normalization depending on inflation, wages, and growth forecast revisions. S&P
Global Economics projects that once the ECB phases out its net asset purchases,
the eurozone’s central bank could raise rates for the first time in December of this
year—after which passive balance-sheet normalization could continue until 2031,
since the average duration of the ECB's bond portfolio is seven years. The Reserve
Bank of Australia has said that its decision to cease its bond-buying program
T-Bills, Bonds & Bond Fund will drop
doesn’t imply a pending rate hike. In contrast with its Western counterparts, the
People’s Bank of China last month cut its key lending rates and indicated that it
may soon further cut interest rates to offset slower loan growth.

“Looking ahead, more consequential than omicron will be

the success (or failure) of central bank policy in slowing inflation without halting
the post-pandemic recovery in its tracks,” S&P Global Ratings said this week in a
special update to its global credit conditions outlook. “The next few months of
increase pace subjected to omicron seriousness
 inflation data will be critical, as they will determine whether the priced-in pace of
Fed tightening would need to accelerate with the attendant risks of a more
disruptive market adjustment.”

Ahead of the Fed raising rates, equity market investors appear to be

moving from growth stocks into value stocks and could also see
small-cap stocks suffer, according to S&P Global Market Intelligence. In
the bond market, investors’ pessimism about short-term growth prospects and
expectations for an eventual economic recovery have contributed to
an inversion in the Treasury yield curve.

Now that economic growth has slightly slowed, inflationary pressures have
increased, and interest rates are soon to rise, change in the credit cycle could
weigh heavily on some weaker companies with low coverage ratios in the middle
market, according to S&P Global Ratings.

U.S. banks are set to benefit from higher rates. S&P Global Ratings anticipates that
banks’ net interest income could rise 10% this year and even more in 2023 if the
monetary policy tightening doesn’t result in an economic downturn or major
market instability. Additionally, S&P Global Market Intelligence anticipates that
community banks will likely enjoy a rebound in margin growth this year and a
material lift in earnings next year on the back of the Fed’s rate hikes.

While some market participants have compared current conditions to the high
inflation and surging wages of the 1970s, the U.S. economy appears
likely to avoid a wage-price spiral despite pay and inflation soaring, according to
S&P Global Market Intelligence.

"For the spiral to happen, we'd need the labor market to become even tighter and
supply chain stress to increase much further," Oren Klachkin, lead U.S. economist
with Oxford Economics, told S&P Global Market Intelligence. "But most
importantly, we'd need inflation expectations to become unanchored."

Today is Friday, February 11, 2022, and here is today’s essential intelligence.

Economy

When Rates Rise: Tighter Monetary Policy Will Provide A Lift To U.S. Banks
 The Federal Reserve's impending tightening of monetary policy could significantly
benefit U.S. banks. When the Fed raises interest rates, it will boost banks' net
interest margins from multidecade lows and help them deal with an inevitable
increase in provisions for credit losses, rising wages and technology spending, and
pressures on some sources of fee income. S&P Global Ratings believes the
combination of higher rates and accelerated loan growth—spurred by the
expanding economy—could drive a strong increase in net interest income for the
banking industry this year with further increases in 2023 and 2024.

—Read the full report from S&P Global Ratings

Access more insights on the global economy >

Capital Markets

Japanese Megabanks See Bad Loan Ratios Rising As Pandemic Lingers

Japanese megabanks are likely to report higher nonperforming loan ratios in the
coming quarters as the lenders have set aside more buffers against bad debts
amid a modest economic recovery and rising borrowing costs. Sumitomo Mitsui
Financial Group Inc. earmarked ￥131.05 billion as loan loss provisions, an
 indicator of a lender’s assessment of future asset quality, in the fiscal third quarter
ended Dec. 31, 2021. It was up sharply from ￥34.56 billion a year ago and ￥16.33
billion in the previous quarter, and the highest among the three megabanks.

—Read the full article from S&P Global Market Intelligence

Access more insights on capital markets >

Global Trade

China Data: Independent Refineries Feedstock Imports Fall 4.3% On Month In

January

The feedstock imports for China's independent refineries fell by 4.3% to 16.38
million mt in January from the 11-month high in December 2021, latest data
compiled by S&P Global Platts showed Feb. 10. Feedstock imports comprise crude,
bitumen blend, and fuel oil. Pure crude imports, which are required to utilize crude
import quotas, amounted to 15.3 million mt last month, down 6.4% from 16.37
million mt in December 2021. The robust feedstock demand from the mega
refineries continued to be key in sustaining these imports in January. Combined
 crude imports by Hengli Petrochemical (Dalian) Refinery and Zhejiang Petroleum &
Chemical rose 11.2% on the month to 5.18 million mt from 4.66 million mt in
December.

—Read the full article from S&P Global Platts

Access more insights on the global trade >

ESG

Scale Of Investment Needed For Energy Transition Makes No Single Mode

Inevitable

The energy sources that dominate in 2050 and whether they deliver crucial
decarbonization reductions depends on policy and investment decisions being
made today and potentially on consumers' willingness to withstand price
disruptions along the way, a Bipartisan Policy Center panel said Feb. 9. Asked to
predict how the energy transition will play out over the next three decades, the
 panelists predicted current oil and gas producers might still play a key role,
whether from continuing to pump the lowest-carbon streams in their portfolios or
from using existing skills to pivot to new areas.

—Read the full article from S&P Global Platts

Access more insights on ESG >

Energy & Commodities

Asia Rethinks Oil Supply, Fiscal Strategy As Crude Races Toward $100/B

The dramatic sprint of crude oil toward $100/b is prompting Asian importers to
rethink supply strategy as well as their fiscal roadmap, which could result in an
aggressive recourse to strategic reserves, changes to fuel subsidies and taxes, and
a much bigger push toward new energy alternatives. Although the oil demand
outlook for top consumers China and India looks resilient following a lengthy
 period of pandemic-hit uneven growth, keeping the oil import bill in check is one of
the biggest priorities in Asia at a time when governments are desperate to allocate
funds for economic revival, analysts said.

—Read the full article from S&P Global Platts

Access more insights on energy and commodities >

Technology & Media

Listen: Next In Tech | Episode 51: Booming M&A In Tech

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Last year closed out tremendously strong, with M&A deal volumes setting new
records. Research director Brenon Daly returns to talk with host Eric Hanselman
about rocket-like growth and the results of the M&A Outlook study. Valuation
multiples are up a full turn, but will this continue into 2022? Interest rates and
market pressures may begin to weigh on deals.

—Listen and subscribe to Next in Tech, a podcast from

S&P Global Market Intelligence
Access more insights on technology and media >

Written by Molly Mintz.