The Bear and the Turtles
- 14 February 2022 (7 min read)
Key Points
- We explore the macro constraints to a re-armament effort in Europe. Russia would struggle. It may be an acute awareness of these challenges ahead which explains Moscow’s tough approach now.
- While this keeps us behind some prominent sell-side calls, we make the case for a cautious approach by the Fed after the March lift-off.
Judging by the public warnings of the US and UK governments, tension with Russia over Ukraine is not abating and may even get paroxysmic this week despite continuing diplomatic efforts. Beyond the impact a further escalation would have on the short-term European outlook, we explore the macroeconomic constraints around a likely re-armament race in Europe. While the current gap in military spending between Russia and the EU looks glaring when expressed in share of GDP, it reverses when looking at the absolute levels. The likely demographic and economic trajectory in Russia will make it very hard for Moscow to keep up with the EU countries if, in a delayed reaction to Russia’s assertiveness, they decide to bolster their own defense spending. It might be Moscow’s very awareness of these demographic and economic challenges ahead which may explain why Russia is ready to go quite far now to protect its influence in Ukraine, which is sees as crucial to the “strategic depth” which has traditionally been a focus of Russian military doctrine. In a nutshell, Moscow would rather have an indirect confrontation with the West before its economic vulnerabilities start impacting its defense capabilities again. Yet, by confronting the West now, Moscow may actually accelerate a re-armament race which it will have a very hard time winning.
Inflation surprised to the upside again in the US in January, but the reaction from the Fed has not been unanimous. While James Bullard called for raising the Fed Funds rate by 100 basis points by July, San Francisco Fed President Mary Daly expressed her support for a prudent approach after the March lift-off. We think the cautious approach makes sense. The very recent weakness in consumer spending may reflect the decline in purchasing power as the combination of strong job creation and robust wage growth is not fully offsetting the rise in consumer prices and the end of the income top-ups by the government. Hawks will probably argue that the release of excess saving - mostly held in checking deposits - back into consumption would keep demand on a unsustainable pace without a significant and quick monetary tightening, but no model can properly explore these opposite scenarios because the US economy has never found itself in a similar position. This would argue for a prudent approach to the pace of rate hikes by the Fed, with a lot of the “learning by doing” which Mary Daly advocates to get the right quantum of tightening. For now, we keep our forecast of four 25 basis points hikes in 2022, which leaves us behind some prominent sell-side calls.
Disclaimer
This website is published by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W) for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation or particular needs of any particular person and may be subject to change without notice. Please consult your financial or other professional advisers if you are unsure about the information contained herein.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.
Some of the Services and/or products may not be available for offer to retail investors.
This publication has not been reviewed by the Monetary Authority of Singapore.
Disclaimer
This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone.
Some of the services listed on this Website may not be available for offer to retail investors.
This Website has not been reviewed by the SFC. © 2023 AXA Investment Managers. All rights reserved.