Market Walk

Macros 2022 – What are the big macro stories to watch out in year 2022?

Year 2021 was the year when hope and confidence returned to the markets. That was largely triggered by growth making a comeback. What are likely to be the macro triggers for 2022. Let us look at how 4 key macros will shape up.

Inflation will trend higher

If central banks think that monetary tightness will bring down inflation, they must think again. The inflation caused by supply chain bottlenecks is likely to persist for much longer. The US inflation is already at the highest level in 39 years and experts are already talking of a return to the Volcker era. The case in India will also be the same as the WPI inflation will persist at higher levels. The pressure on costs will continue in 2022.

Will bond yields inch higher?

Most banks and bond investors are more confident than central banks about higher bond yields. That is evident from the way RBI bond auctions devolved due to lower yields offered. As inflation rises and liquidity tightens, bonds across the world will see a spike in yields at the long-end as well as the short-end. The inflation is likely to grow, irrespective of the monetary measures of central banks resulting in sharply higher bond yields. This could have an impact on equities as the cost of capital will go up and also make a host of high leverage companies extremely vulnerable. Bond yields could certainly surprise on the upside in 2022.

Will GDP make a recovery?

If the last 2 years were all about state sponsored initiatives, year 2022 will be about corporate sponsored initiatives. For the first time, the world is likely to see a sharp improvement in capex across most of the key sectors. This will include huge outlays on infrastructure which will result in a multiplier effect on jobs and output. The assumption here is that the Omicron virus does not pose a major threat to the economy, but it does look like the global economies are much better equipped to handle the situation compared to the last 2 years. There will still be disparities in recovery, but most EMs will see durable growth.

What about world trade?

This is likely to be the big story of year 2022. Global trade had suffered in 2021 due to various factors. There were port level constraints, labour shortages and the shortfall in containers. These factors constrained trade as was also seen in tepid growth in Indian exports. These are likely to be substantially addressed and also resolved in 2022. It is also expected that the WTO will take a more liberal approach to global trade to allow many of its members to revive trade to pre-COVID levels. Indian GDP growth in the last 2 quarters have already been driven  by a surge in total trade. These measures will substantially help India to achieve its more ambitious targets on the export front in the year 2022!

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