Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
Federal Reserve minutes indicate tapering is likely before the end of the year
Minutes for the US Federal Reserve showed that a majority of top committee members believe that the central bank should start ‘tapering’ their asset purchase programme before the end of the year. Currently the bank spends $120bn each month on fixed income securities which has served to support liquidity in the financial system since the beginning of the pandemic. The gradual reduction of purchases, known as tapering, reflects the belief that the economy and financial system is healthy enough to sustain itself without artificially high levels of liquidity and low borrowing costs.
Eurozone inflation higher than expected in July, despite core inflation falling
Eurozone consumer prices increased by 2.2% in the year to the July, 0.3% higher than expected by economists. Energy prices and a surge in accommodation prices were the major factors. The data did not present an unambiguously inflationary picture however, as core inflation – which strips out volatile elements such as energy – actually fell in the year to July, from 0.9% to 0.7%, as a result of earlier summer clothing sales.
In terms of the regional breakdown, Germany saw the biggest increase in inflation as the headline inflation reached an increase of 3.1% on the year. Spain also saw prices increase by more than the ECB target, as inflation reached 2.9%. France and Italy both saw inflationary pressures ease.
UK retail sales fell in July but stay more than 5% above the pre-pandemic peak
UK retail sales fell 2.5% in July which was worse than the 0.2% expansion expected by economists. This leaves the level of monthly consumer spending in the UK 5.8% above the pre-pandemic peak but 3.9% down on the level of spending in April this year.
The decline in spending was relatively broad based; food store sales fell -1.5%, non-food store sales fell -4.4% and fuel sales fell -2.9%. Although there are mitigating factors (bad weather and a higher proportion of people self-isolating), the fall in consumer spending is most likely reflective of increasing nervousness over the resurgent COVID-19 cases in UK in the past few months. This is reflected in the GfK consumer confidence index, a survey that asks consumers to share their level of confidence about the economy, which dropped from -7 in July to -8 in August.
Markets
For the second week in a row emerging markets led global equity markets lower, dragging the global aggregate MSCI ACWI index down 1.6%. China and Brazil were the two of the worst performing markets globally, falling 6.1% and 5.2% respectively. In China, hawkish rhetoric from regulators towards major internet platform and digital technology companies continued last week as Beijing approved a new strict data privacy law. In Brazil, the central bank responded to higher inflation by committing themselves to doing ‘what’s needed to tame prices’. The prospect of tighter borrowing and lending conditions, as well as a stronger currency, should be a negative for domestic Brazilian businesses. Similarly, tapering comments by the US central bank lead to weakness in equities last week, although less pronounced.
Look out for next week’s update, where we’ll be focusing on the August PMI results and the Fed Chairman Jerome Powell’s speech at Jackson Hole.
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