Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
Yen slips to a six-year low as central bank intervenes to buy government bonds
The yen fell almost 1% to a six-year low on Monday as the Bank of Japan (BoJ) announced actions to stop bond yields from rising above its target. Most of the yen’s recent weakness is due to diverging monetary policy between Japan and western economies, particularly the US. As interest rates rise elsewhere, the attractiveness of Japanese government bonds to Japanese investors falls, resulting in investment flowing away from Japan.
In contrast to recent moves by the US Federal Reserve (Fed) that signal a hawkish stance, the BoJ has repeatedly said that it will act to keep monetary policy loose and supportive. The latest announcement saw them offer to buy an unlimited amount of government bonds, at the same time as other major central banks are started to scale back asset purchases introduced during the pandemic.
Chancellor Sunak defies critics by pushing ahead with planned tax increases despite a dramatic rise in the cost of living
UK Chancellor of the Exchequer Rishi Sunak went ahead with the planned increase to National Insurance payments despite criticism that the tax rise would hit workers just as rising inflation outstrips earnings increases. The Office for Budget Responsibility warned that living standards are set ‘for a historic fall’, the biggest decline since records began in the 1950s.
The Chancellor did use the Spring Statement to cushion the blow by reducing fuel duty and increasing the threshold at which people start paying National Insurance. However, there has been criticism that the changes do not go far enough to help those worst off, particularly those relying on benefit payments. Citing reasons why further action wasn’t taken, the Chancellor highlighted the impact of rising rates on servicing government debt payments and the need to be fiscally responsible.
UK PMI rises in March and remains in expansionary territory
The purchasing managers' index (PMI) rose in March, with the services component hitting a nine-month high of 61.0. There had been concerns that the impact of rising inflation and the war in Ukraine would soften growth, but it remains robust and comfortably above the threshold considered to signify growth.
Whilst this should bring some comfort to investors, risks lie ahead as inflation looks set to rise further and consumer confidence shows signs of being detrimentally impacted.
Market review
All major markets had a positive week, with the MSCI All Countries Index up 6.5%. The Chinese market, as measured by the MSCI China Index, had a particularly strong week after favourable comments from Chinese authorities boosted investors’ expectations.
Brent Crude, the benchmark for wholesale oil prices, remains elevated. However, there are early signs that prices are starting to fall as investors price in the impact of a slowdown in China, the world’s biggest importer of crude oil.
Bond yields increased significantly as the reality of interest rate hikes started to reduce what investors are willing to pay for fixed income. The market expectation is now that the Fed is likely to increase interest rates at every meeting this year, with the possibility of 50bp rate hikes at the next two meetings.
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