NN IP: Hanging in the balance

March 31, 2022

The situation in Ukraine remains uncertain, and monetary policymakers are sending increasingly hawkish signals. With this in mind, NN Investment Partners (NN IP) made several changes to their tactical asset allocation.

Aviral Utkarsh, Multi Asset Strategist at NN IP:

“Monetary policymakers are meanwhile dialling up the hawkishness. The Fed signalled its readiness to hike by 50 bps and to push the policy rate above neutral if it deems this necessary to restore price stability. The news and social media sentiment score in the chart shows that the current monetary policy stance is perceived as among the most hawkish of the last 20 years.

The big question is whether the Fed can carry out such a policy. Moving too fast could trigger an excessive tightening of financial conditions or a further sharp decline in consumer and business confidence. Recent data make the answer unclear. The flash PMIs in developed markets improved in March, driven by both manufacturing and services. The services component has improved markedly over the past two months as the Omicron drag faded.

For the time being, the strong underlying fundamentals of the developed market economies are counterbalancing the tightening financial conditions and growing geopolitical risks. The strong fundamentals still include solid business profitability and a big pile of excess household savings.

If consumer confidence remains robust, businesses will have the fuel to increase labour demand and capex spending. Meanwhile, the combination of strong labour income growth and high levels of net worth should induce the household sector to increase spending. ”