Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
US PMI surveys supports expansionary narrative
The results of monthly surveys of the purchasing managers index (PMI) have been released, which illustrate how businesses view the near-term outlook. Perhaps the most meaningful data point was the US composite index rising to 59.5 from 58.7 a month earlier. This indicates the fastest expansion of business activity since July 2014.
At the same time, cost pressures remain elevated, with input cost inflation (such as materials, factory overheads and labour) accelerating to the fastest rate on record (since October 2009).
In combination, these readings support the narrative that has driven US interest rates higher in recent weeks: a substantial fiscal spending package, monetary policy support and a high household savings rate leading to economic growth and passing through into inflation.
Euro area retail sales fall faster than expected
Euro area retail sales fell by 5.9% month on month in January, far exceeding expectations of a 1.4% contraction. This was the sharpest contraction since April last year.
The data indicates that COVID-19 related restrictions are continuing to supress consumer demand and confidence. This is in stark contrast to the US where retail sales grew by over 5% in the same period.
The muted demand from consumers is unlikely to rebound in the short term as vaccination programmes in Europe have been relatively slow, although social distancing restrictions have led COVID-19 cases lower across the bloc.
US Federal Reserve Chairman warns market against higher rates
Jerome Powell followed up his dovish comments to Congress, by warning markets that he "would be concerned by disorderly conditions in markets or persistent tightening in financial conditions”. However, he did note the importance of remaining ‘patient’ with the higher inflation expected this year as it is likely to be transitory in nature, owing to the base effects of a very low oil price in March and April last year.
The implicit warning in this case is that a sustained increase in US interest rates – that threatened to destabilise the supportive lending environment that the Fed is seeking to uphold – would be met by policy action.
Nevertheless, the market was not convinced, inferring that for the time being Fed policy will remain on hold until ‘disorderly’ markets are fully realised. On the back of these comments, the yield on a 10-year US Treasury rose to 1.6%.
For the second week, global equities, as measured by the MSCI ACWI index, finished lower, led by the rise in US government bond yields. Within equities, the rotation from growth stocks to value stocks continued; the MSCI Energy index finished the week roughly 5% higher while the MSCI information technology sector contracted by roughly the same amount. The energy index is the best performing index in the year to date, having been the worst performer in 2020, exemplifying the volte-face in equity markets.
Look out for next week’s update, where we’ll be focusing on US CPI inflation, UK monthly GDP and communication from the ECB monetary policy meeting.
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