Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
China’s zero-COVID policy adds more disruption to supply chains, but economic data surprises to the upside
China’s zero-COVID policy is facing its toughest challenge yet as Shanghai enters its fourth week of lockdown. First-quarter economic growth beat expectations, coming in at 4.8% year-on-year, versus consensus estimates of 4.2%. Much of this is being attributed to policy easing, following liquidity injections in December and interest rate cuts in January that helped to bolster economic growth.
Policy makers in China have continued to prioritise factory activity, with some workers being required to live and work in their factories in order to avoid becoming infected. However, the impact on supply chains is starting to be felt.
This is particularly evident in the port of Shanghai, the world’s largest seaport for trade, where exports are down 20-40% in April. The Shanghai Containerised Freight Index declined last week by 0.8%, its 13th consecutive week of decline. Whilst some of this can be attributed to the effect of seasonality after the lunar new year, the impact of lockdown restrictions is starting to feed through to economic data releases. In Shanghai and Beijing, truck freight is down 83% and 40% respectively and domestic air freight is down 85%. Even in places which don’t have a full lockdown, the burden of paperwork needed to cross provincial borders is preventing the smooth running of supply chains.
Markets fall after US Federal Reserve signals an acceleration in rate hikes
Markets were shaken last week when Jerome Powell, Chairman of the Federal Reserve (Fed), commented that “it is appropriate…to be moving a little more quickly” in raising rates in the face of higher inflation.
The market took this as confirmation that the Fed’s meeting in May will see US interest rates rise by 0.5%, adding to March’s rise of 0.25%. This would take US rates to 1.0%, still well below the 2-3% level that the Fed considers ‘neutral’. Stocks in the US fell as a result, with the S&P 500 Index down more than 3% over the week.
UK retail sales and consumer confidence fall as inflation bites
UK retail sales volumes declined by 1.4% in March, following a fall of 0.5% in February as inflation hit consumers. Although overall sales volumes remain 2.2% above pre-pandemic levels, food store sales were particularly affected, down 1.1%, as rising food prices and wider increases in the cost of living caused consumers to tighten their purse strings.
UK consumer confidence fell by 38 points in April, almost hitting the low point seen in July 2008 during the financial crisis. Confidence in the general economy was particularly negative, down 55 points and reaching levels even worse than those seen during 2008. Given the energy price cap increase that is coming later this year, inflationary concerns are likely to persist. The market now sees a good chance that the Bank of England will raise rates by 0.5% at its May meeting, taking the UK base rate to 1.25%, although this seems less certain than the chances of a 0.5% rate rise in the US.
Market review
All major indices ended the week lower, with the MSCI All Countries Index showing a decline of 2.4%. Chinese equities registered the largest one-week decline, falling 6.6% as measured by the MSCI China Index, while emerging market equities also registered material losses, with a 2.8% fall in the MSCI EM Equities Index. Bond markets continued to decline, sterling corporate bonds falling 0.7%.
Oil, as measured by the Brent Crude price, remains above $100 a barrel. Concerns over COVID-19 restrictions in China have led to fears of a slowdown in oil demand which have weighed on the oil price in recent weeks.
Gold had a volatile week, but the spot price ended the week down 4.2%.
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