Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
US bans Russian oil imports, adding to inflation concerns
The Biden administration announced a ban on Russian fuel imports in response to the ongoing invasion of Ukraine. Whilst US dependence on Russian oil is relatively small, at c.8%, the move will reinforce already high levels of US consumer inflation, leading to further pressure on the US Federal Reserve (Fed) to tighten monetary policy.
Previous sanctions had avoided energy, Russia’s largest export, due to fears that including it would hurt consumer spending. Elsewhere, the UK announced a partial restriction on Russian fuel, banning oil imports but continuing to allow natural gas and coal. Other European countries rely more heavily on Russian fuels and have thus far said they will not ban imports.
ECB surprises markets with a more hawkish stance, signalling an end to QE
The European Central Bank (ECB) surprised investors by announcing a more hawkish tapering of its asset purchasing programme than many had expected.
They are currently purchasing €70bn per month through the programme and will reduce this to €40bn in April, tapering by €10bn per month through to June. It had been anticipated that the tapering would be done over the course of two quarters, so the acceleration suggests that the ECB is increasingly concerned about inflationary pressures.
The ECB also revised down growth forecasts for the Eurozone by 0.5%, to 3.7%, reflecting the effect of higher energy prices on household spending. Finally, they indicated that they will keep interest rates at current levels for some time and that any changes will be gradual.
US CPI data shows price pressures are the highest for 40 years and widespread
US CPI data for February showed a 7.9% rise over the past 12 months, the highest level for four decades. Whilst the figures were in line with expectations, they do indicate that price rises are now broad-based and impacting categories such as rent or shelter costs, which have historically been more stable than volatile elements such as food and energy.
Given these widespread inflationary pressures and the fact that commodity price rises due to the invasion of Ukraine are yet to be fully felt, markets expect the Fed to start raising interest rates at its Federal Open Markets Committee meeting later this week.
Global equities recovered marginally last week, led by Europe, which rose in response to hopes that negotiations between Russian and Ukrainian officials would lead to a ceasefire or end to violence in Ukraine. This also led oil prices markedly lower over the course of the week.
Meanwhile, higher than expected inflation in the US reminded markets that the Fed has little room to manoeuvre with its monetary policy and would have to begin raising interest rates. US yields generally moved higher over the course of the week.
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