Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
Eurozone inflation rises to 3.4% in September but monetary tightening remains unlikely
Eurozone consumer prices rose by 3.4% in the year to September, up from 3.0% a month earlier. The move was largely expected by economists and reflects the ongoing supply-chain disruptions and price pressures that are affecting firms at present. Energy price inflation was also relevant, rising from 15.4% to 17.4%, as a result of the rise in regulated energy prices. However, core inflation – which adjusts for volatile elements such as energy and food – rose only slightly, from 1.6% to 1.9% in the year to September.
Although price pressures are likely to persist and potentially intensify until the end of the year, it is unlikely that the ECB will move to counter rising consumer prices given their expectation that the price pressures currently driving inflation should prove largely transitory. ECB projections are for inflation to return to below the 2% target by the end of 2022.
UK economy grew faster than originally thought in Q2 thanks to ‘wall of demand’ from consumers
The UK’s Q2 GDP growth was revised up from 4.8% to 5.5% as compared to the end of March, thanks to a ‘wall of demand’ from consumers, which reduced the households’ savings rate by 7%, down to 11.7%. The normal level of household savings is roughly 5%. This brought the UK economy back up to 3.3% below its pre-pandemic level. The upward revisions were made to government consumption, private investment and net exports, while consumer spending remained the largest component of the growth rebound. Looking forward to Q3, it is likely that the rate of growth will slow as most of the rebound in activity has occurred. The ONS estimates that GDP growth in month of July was only 0.1%.
US manufacturing growth stabilises amid supply chain and labour market concerns
The ISM manufacturing index, which survey US manufacturing businesses to gauge their current assessment of the growth outlook, came in better than expected for September, rising from 59.9 to 61.1. Expectations were for a further moderation to 59.5. A number above 50 represents improving conditions. Respondents highlighted that demand remained strong but manufacturers are struggling with supply shortages and face an “unprecedented number of hurdles to meet” rising demand.
September was a notably poor month for asset markets as investors grew increasingly nervous about China Evergrande, and worse than expected macroeconomic data and rising prices fed expectations for monetary tightening. Global equity markets (measured by the MSCI ACWI) registered their largest drawdown in the year so far, led by the US. Government bond yields in the US and UK rose significantly over the month, as central bankers seemingly reasserted their commitment to tackle inflation after many months of expressing their view that price rises were transitory.
The best performing assets in September were linked to the rising price of oil and natural gas, which feeds through into the prospects of energy companies. Meanwhile in Japan, success in the rollout of its COVID-19 vaccination programme saw the ‘state of emergency’ lifted for the first time since April. This added to growing investor sentiment surrounding the Japanese general election, due to take place at the end of November. The MSCI Japan index rose 5% over the month.
Look out for next week’s update, where we’ll be focusing on the US jobs report and European retail sales.
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