Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
US inflation rises to highest level since 1982, causing consumer confidence to drop to 10-year low
Consumer price inflation rose from 7.0% in December to 7.5% in January, above economists’ expectations for a rise to 7.2%. Underlying the move was additional evidence that points to persistent price increases; services inflation and rent inflation, which account for more than a third of the consumer price index, are approaching 30-year highs.
The data exacerbated investor concerns that the Federal Reserve (Fed) now has no choice other than to increase interest rates quickly and withdraw liquidity support from financial markets. The market now expects six interest rate hikes this year that would bring the headline policy rate to 1.75%. In October last year the market had priced in interest rates rising to only 0.5% by the end of 2022.
The other way in which inflation is weighing on investor sentiment is through the outlook for consumers. The University of Michigan consumer sentiment survey fell to its lowest level in more than a decade in early February amid expectations that inflation was likely to remain an issue. Deteriorating consumer expectations typically lead to falling retail spending, which is harmful for economic growth. However, there are some potential mitigating factors. Households have ample savings as a result of government stimulus packages during the pandemic, so there is bandwidth for spending to continue. Moreover, most of the deteriorating sentiment was linked to households with incomes of $100,000 or more, which could reflect falling stock market prices.
The UK economy grew by 7.5% in 2021, remaining below its pre-pandemic level
The UK economy contracted by 0.2% in December as concerns over the Omicron variant and the high proportion of people who were self-isolating led consumer-facing services to fall by 3%. By contrast, manufacturing output remained robust and overall UK GDP increased by 7.5% for the full year, after a 9.4% fall in 2020. This leaves the UK economy just 0.4% smaller than it was at the outset of the pandemic.
There was also an indication that Brexit continues to weigh on the economy, with export and import volumes respectively 18% and 9.2% below their pre-pandemic level.
Last week, markets maintained their focus on stubborn inflation and the ongoing threat of a Russian invasion of Ukraine. The former was reflected in the US Treasury 10-year yield, which rose to above 2% following the news of consumer inflation reaching 7.5%. This rippled through equity markets, causing growth stocks to fall in favour of more reasonably priced value stocks.
News late on Friday evening saw a dramatic escalation in uncertainty over the prospect of a Russian invasion of Ukraine. A White House national security advisor described the possibility of an attack as “high enough” and “now immediate”, and urged Americans to leave Ukraine within the next two days. Oil prices ticked up once again on the news, while safe haven assets rallied. The price of oil (Brent Crude) is now up more than 20% for the year to date.
Look out for next week’s update, where we’ll be focusing on Fed minutes and European inflation.
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