Netflix & recession chill?

April 22, 2022

Consumers roll back discretionary spending as downgrades to growth expectations look likely.

Global yields posted new highs over the past week, with central banks continuing to make hawkish comments with respect to the trajectory of monetary policy. With risk sentiment holding up relatively well, policymakers have continued to up the ante in the absence of a dramatic tightening of financial conditions. During the past week, Bullard floated the idea of a 75bp Federal Reserve (Fed) hike, with Powell later giving credence to the idea that two or more hikes of 50bp are on the table in what appears to be a front-loaded tightening cycle.

Meanwhile, in Europe, Governors Kazaks and de Guindos were among the first to flag a rate hike as likely as early as the July ECB meeting, while Lagarde seems to agree with sentiment in the US that the demand for labour is currently too strong.

Yet with real incomes being squeezed as prices move higher, it is interesting to keep a close eye on economic data that may suggest that the economy is starting to be impacted.

From this standpoint, the loss of 200,000 subscribers from Netflix over the past quarter can be viewed in the context of consumers rolling back discretionary spending as bills increase elsewhere. That said, perhaps it is not too surprising that consumers want to spend less on content as the pandemic ends and life normalises. It is also true that Netflix is seeing rising competition from other streaming platforms.

It will be interesting to observe whether the ‘Netflix chill’ will show up in other areas of consumption. In light of this, mortgage rates at 5.25% may also start to weigh more apparently on the housing market, and although it might be premature to call for a recession in 2023, it seems appropriate to continue to downgrade growth expectations for the year ahead.

As things stand, we would currently attach a probability of recession at around 30%. It strikes us that whether a contraction manifests relies predominantly on the path of inflation over the coming months. A continued overshoot in prices makes such an outcome more likely, with central banks needing to raise rates more aggressively. However, if the delta on monthly inflation numbers turns negative with price pressures normalising, then it is quite possible that central banks could soften their messaging and mitigate the extent of tightening later this year.

Looking at inflation, on the one hand, economic re-opening should see positive base effects, which have elevated prices, dropping out of the annual data. Supply constraints have eased versus last year and although China lockdowns can create ongoing disruption, bottlenecks have shown signs of diminishing.

On the other hand, labour markets remain very tight and show no sign of cooling. Wages may spiral higher as inflation expectations de-anchor. This could create powerful second-round inflation effects that policymakers won't be able to ignore.

Meanwhile, events in Ukraine are likely to sustain upward pressure on commodity prices, with food inflation compounding recent moves seen in energy.

At this point, it seems that risks are quite finely balanced and the backdrop is evolving rapidly. This is creating material uncertainty in assessing the investment landscape on a medium-term view.

For now, we continue to advocate a lower-risk approach to portfolio construction, awaiting more clarity in discerning market direction or looking for opportunities should short-term volatility create pricing opportunities.

On a relative-value basis, we continue to favour euro rates relative to the UK, on the thinking that the UK will see a much bigger inflation overshoot than the eurozone in April – even with the UK economy more exposed to a negative growth shock as a result of a squeeze on real incomes. In light of this, we retain a negative view on both Gilts and the pound.

Opinion polls appear to suggest that Le Pen is very unlikely to deliver a surprise victory versus Macron in Sunday's French elections. Clearly, were Le Pen to win we would see eurozone markets in turmoil, though with this risk largely discounted, we doubt there will be much of a positive reaction to a Macron win.

Meanwhile, a more hawkish ECB continues to represent a risk to the periphery. The days of asset purchases seem to be numbered, and although we have seen comments about a backstop mechanism to support spreads, we feel that we are still a long way from consensus on such an initiative. History in Europe suggests such policy progress only comes in the wake of a crisis and we doubt there is much incentive to support 10-year BTPs unless the spread to Bunds is well above 200bp.

Our relatively cautious macro outlook means that we maintain a broadly flat exposure in credit, with short CDS positions held against long exposures on a relative value basis.

In FX, we retain a long dollar bias and have added a short in China renminbi. Meanwhile, we have become constructive on Thai baht as tourism reopens and have added to the Israeli shekel given the strong underlying economic fundamentals.

Looking ahead

More data will be needed in order to grasp a firmer hold on the future path of economic growth, inflation and monetary policy. From a macro perspective, there will often be times when it seems possible to project forward with a fairly high degree of confidence in what the economy is likely to do in the coming 12 months, but it strikes us that this is not one of those moments.

Indeed, there seems to be a sense of unpredictability at the moment – one that investors are not being compensated for at prevailing valuation levels.

From this standpoint, perhaps it makes sense to sit back, watch Netflix and chill out. As for the streaming platform itself, its equity price fall may just be a story of what happens when a stock goes ex-growth. That said, with the share price now 68% below last November’s highs, it could be said that investors have rather been left up Schitt’s Creek.

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.

This document may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (the ManCo), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany and Italy, the ManCo is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by BlueBay Asset Management LLP (BBAM LLP), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and is a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In United States, by BlueBay Asset Management USA LLC which is registered with the SEC and the NFA. In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts of the registered office of the Swiss representative shall have jurisdiction pertaining to claims in connection with the distribution of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), where applicable, the Articles of Incorporation and any other applicable documents required, such as the Annual or Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Australia, BlueBay is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, BBAM LLP is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits BBAM LLP to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client”, as such term is defined under applicable securities legislation. The BlueBay group entities noted above are collectively referred to as “BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of BlueBay by the respective licensing or registering authorities. Unless otherwise stated, all data has been sourced by BlueBay. To the best of BlueBay’s knowledge and belief this document is true and accurate at the date hereof. BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute our judgment and are subject to change without notice. BlueBay does not provide investment or other advice and nothing in this document constitutes any advice, nor should be interpreted as such. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction and is for information purposes only. This document is intended only for “professional clients” and “eligible counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) ) or in the US by “accredited investors” (as defined in the Securities Act of 1933) or “qualified purchasers” (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer. No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of BlueBay. Copyright 2021 © BlueBay, is a wholly-owned subsidiary of RBC and BBAM LLP may be considered to be related and/or connected to RBC and its other affiliates. ® Registered trademark of RBC. RBC GAM is a trademark of RBC. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR, partnership registered in England and Wales number OC370085. The term partner refers to a member of the LLP or a BlueBay employee with equivalent standing. Details of members of the BlueBay Group and further important terms which this message is subject to can be obtained at www.bluebay.com. All rights reserved.

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.