État de l'Union : ce qui nous attend

L'invasion de l'Ukraine par la Russie a fait planer l'incertitude sur la politique intérieure et étrangère, ainsi que sur l'économie et les marchés. Cette situation survient dans un contexte d'inflation galopante, de hausses imminentes des taux d'intérêt, de goulots d'étranglement persistants dans la chaîne d'approvisionnement et d'une pandémie qui n'a pas encore été endiguée.

BMO a organisé un panel sur les questions de politique intérieure et étrangère et sur l'impact qu'elles pourraient avoir sur les marchés, l'économie et la façon dont la réserve fédérale pourrait répondre aux préoccupations actuelles concernant l'inflation.

Écoutez la discussion complète.

Le balado Faits saillants COVID-19 de BMO est diffusé en direct sur toutes les grandes plateformes, dont Apple, Google et Spotify.

Ce balado est en anglais seulement.

Participants :

• 

  Brian Belski, Stratège en chef des investissements, BMO Marchés des capitaux

• 

  David Jacobson, Délégué du conseil, BMO Groupe financiers

• 

  Earl Davis, Chef - Titres à revenu fixe et Marchés monétaires, BMO Gestion mondiale d’actifs

• 

  Michael Gregory CFA, Directeur général, économiste en chef délégué et chef du Service des études économiques aux États-Uni, BMO Marchés des capitaux

As Jacobson noted, “These are extraordinary times.” That was certainly reflected in the first 15 minutes of Biden’s speech. Jacobson, who served as U.S. Ambassador to Canada in the Obama administration, noted that State of Union addresses by nature are typically two speeches in one—one that looks back at the accomplishments of the past year, and one that looks forward to what the administration hopes to accomplish. Biden’s speech included a third element: the conflict in Ukraine.

“I was reminded of something I realized back when I worked in the White House,” Jacobson said. “No matter how carefully you prepare, you simply can’t control events. And events pretty clearly took over the speech.”

Jacobson considered Biden’s remarks on Ukraine the most effective part of his speech because it emphasized the American value of democracy over autocracy and it successfully united the country behind our efforts.

Jacobson said that was reflected in Biden’s remarks on inflation and the laundry list of proposed solutions designed for bipartisan appeal. Those included investing in infrastructure, reshoring manufacturing and the U.S. joining 30 other countries to release 60 million barrels of oil from strategic petroleum reserves to mitigate the impact of oil price spikes.

From Gregory’s perspective, the consequences of the Russia-Ukraine conflict are likely to exacerbate inflation’s impact on American consumers over the next few months. With January’s consumer price index climbing 7.5% year-over-year, a 40-year high, Gregory outlined three channels through which the struggle with inflation could worsen.

“The first is oil prices,” he said. “Russia is a major oil producer, and although the sanctions put in place haven’t dealt with that sector so far, the market is getting very nervous that some disruptions would eventually result from this conflict.”

Gregory noted that WTI oil prices crossed $111 a barrel the day after Biden’s speech. “Given the fact that every $10 increase in oil results in headline inflation jumping 0.4%, that tells us there’s potentially looming a full one percentage point increase in inflation from current levels if oil stays where it is. This would have a powerful impact on consumers.”

A lengthy conflict could also impact food prices, given that both Russia and Ukraine are major exporters of grains and vegetable oils. Well before the invasion, consumers were already facing rising food prices, thanks in part to wheat and corn prices drifting higher and the ongoing supply chain disruptions. Gregory added that further disruptions to the global supply chain represents the third channel of potential trouble for consumers.

“We’re already seeing that impact unfold in the European automotive sector,” Gregory said. “Here in the U.S., we’re still recovering from the production disruptions that were caused by the surge in absenteeism related to surging omicron cases. Add all these things together, and it does seem that over the next month or two we will likely be heading well into the 8% range in terms of inflation with some upside risks.”

Another inflationary risk that remains worrying is what Gregory called “a sea of excess savings and liquidity sloshing around the U.S. economy.”

“It literally causes supply bottlenecks to be remedied a little more slowly than they otherwise would be, simply because demand can continue to remain strong,” Gregory explained. "At the same time, all that liquidity provides an avenue for consumers and businesses to keep paying higher prices, higher wages and higher costs longer than they would otherwise.”

One positive note: as onerous pandemic restrictions seem to be receding for good, demand is shifting away from goods and back to services as people start to take vacations and eat in restaurants again.

As for Gregory’s economic forecast, he still expects 2022 GDP growth of about 3.5%, albeit with some downside risks. But he pointed out that, omicron aside, the U.S. economy started the year with a lot of momentum in terms of jobs, consumer spending, capital expenditures and the housing market.

“That momentum will give us a little bit of a running head start into whatever kind of headwinds we’re inevitably going to feel from this conflict,” Gregory said.

Given the risks of even higher inflation, Federal Reserve Chair Jerome Powell signaled that the Fed would raise interest rates 0.25% during its March policy meeting. Overall, Davis expects rates to climb 1.5% this year, and another 1.5% in 2023. He also outlined what he termed the good, the bad and the ugly of interest rate hikes.

On the good side, there’s the fact that the U.S. is at full employment, as well as the Fed’s belief that current growth is self-sustainable. “You're seeing wages go up, consumption go up—it's feeding upon itself, so we don’t need that accelerant of stimulative rates anymore,” Davis said.

The bad side, Davis said, is that inflation is essentially a consumption tax. The Fed’s efforts to control that means it could raise rates to a fairly high level to get it under control. The ugly part could come if inflation expectations become unmoored.

Davis pointed out the current 10-year breakeven inflation rate is still within the 2% to 3% inflation range, but it’s been climbing steadily since late January.2

“There's a danger of it becoming unanchored because of the higher inflation prints we're getting monthly,” Davis said. “The danger if that becomes unanchored is you get aggressive 50 basis point hikes successively until we get the inflation genie back in its bottle, and that is something that the Fed does not want to go to. That brings uncertainty and instability.”

The market is still dealing with headlines on the Russia-Ukrainian conflict on an hourly basis. The U.S. market has corrected by more than 10% while Canada has outperformed, which is not surprising, especially given its strong reliance on energy. But pressures on the market from geopolitical events typically don't last very long. If anything, the market is dealing with more uncertainty with respect to inflation and interest rates.

Our research shows that stocks should go up along with interest rates. That’s because interest rates go up when the economy is improving. Stocks lead earnings, which lead the economy. For now, we believe that the market is in the early stages of transitioning to a focus on fundamentals.

We think American companies, in particular, are amazingly consistent in terms of their earnings. We think over the next three to five years, North America is the place to be in terms of consistency, and we believe that foreign investors will pay for that consistency. That's why we remain bullish on both Canada and the U.S. over the next 12 to 18 months.

And remember: never discount the U.S. or Canadian consumer. There’s lots of cash on people’s balance sheets; the consumer has rebuilt a lot of that and paid-off their debts. There's lots of cash on corporate balance sheets, and we think the low level of interest rates, double-digit earnings growth and attractive valuations still tell investors that they should maintain their equity positions.

We covered even more ground in our discussion, including what factors would cause Gregory and Davis to change their forecasts. You can watch a replay of the full conversation here:

_{1 U.S. Energy Information Administration}

_{2 Federal Reserve Bank of St. Louis}