Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
US Federal reserve minutes signal a more hawkish attitude
Minutes from the March US Federal Reserve (Fed) meeting were released, showing a more aggressive interest rate hiking policy to come. At the March meeting, the Fed had agreed a 25-basis point rise, lifting the interest rate above its historic near-zero level. The newly released minutes show the potential for a 50-basis point increase at upcoming meetings.
Furthermore, the minutes indicated the pace at which the Fed is looking to reduce the trillions of dollars’ worth of bonds it holds. The consensus implied that it would let $95 billion worth a month roll off its balance sheet, starting from May and lasting for three months, as the bonds start to mature and are not repurchased.
Taken together, the moves may signal the start of a more concerted effort to control inflation.
UK GDP growth misses consensus expectations, with a slowdown expected in the coming months
UK GDP rose 0.1% month-on-month in February, missing consensus expectations of +0.2%, and showing a notable slowing after a 0.8% rise in January.
Construction and industrial production led the slowdown, falling by -0.1% and-0.6% respectively. Meanwhile, the service sector, in particular consumer-facing services, grew by the greatest extent, as tourism picked up +33.0% over the month. Nevertheless, consumer-facing services remain -5.2% below their pre-pandemic levels. Growth in the services sector was offset by a considerable decline in COVID-19-related health spending, down -49% as the government slows the vaccination rollout and limits free testing.
Whilst the UK economy has enjoyed a strong start to 2022, there are concerns that we are at the start of slowdown to growth, as the cost of living crisis dents consumer confidence and household spending.
Market review
Global fixed income markets were the major mover last week, as hawkish commentary and high inflation fuelled interest rate hike expectations. The US 10-year yield rose 30 basis points from c. 2.4% to c. 2.7%, more than double the level in December 2021. Euro area rates and UK rates also rose rapidly.
Concerns over rising inflation and the potential for interest rate hikes led to a negative week in stock markets, with all major equity indices ending the week in negative territory, apart from the UK as measured by MSCI UK IMI which ended up +1.8%.
Oil prices, measured by Brent Crude, retreated from their highs, losing -1.5%. However, there are concerns that the inflationary surge seen in energy prices will transfer to food prices, as the war in Ukraine impacts wheat and fertiliser exports. Gold was the biggest winner in commodities, up 1.1%.
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