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 leaves door open to faster interest rate hikes
Last week’s Federal Reserve (Fed) did nothing to calm anxious investors over the likely path of monetary policy tightening for the rest of 2022.
Chairman Powell indicated that the “Committee expects it will soon be appropriate to raise [the] target range” for interest rates, the clearest hint yet that the first interest rate hike is likely to come at the Fed’s March meeting. This was largely expected, but Powell’s further remark that “there’s quite a bit or room to raise interest rates without threatening the labor market” was seen as decisively hawkish. In response, markets are now pricing in five interest rate rises over the next 12 months, which would bring the headline rate to 1-1.25% by the end of 2022.
There was no explicit guidance on the timing of quantitative tightening but there was an indication that the Fed regards interest rates as the primary means of adjusting monetary policy.
US economy expanded by its fastest rate since 1984 but momentum seems to be slowing
The US economy finished 2021 with another quarter of robust growth, expanding by 6.9% on an annualised basis in the fourth quarter. On a quarterly basis, the economy expanded by 1.7% from the end of September to the end of December. This is markedly faster than the 2.3% growth seen in the third quarter and brings the overall rate of economic growth for 2021 to 5.7%, the biggest increase since 1984.
Consumption was once again the cornerstone of US growth, with personal consumption rising 3.3% in the final three months of the year. Inventory growth was also supportive as companies focused on rebuilding stockpiles after months of supply chain disruptions. In contrast, public spending began to drag on growth as fiscal spending normalises from excess levels during the pandemic.
Although US growth remained robust in the fourth quarter, there are some signs that momentum in the economy slowed in January. PMI survey data released last week showed that the composite index fell from 57.0 to 50.8, an 18-month low. According to data provider Markit, the “slowdown in output growth was broad-based, with both manufacturing and service sector firms reporting near-stalled output as the steep spike in virus cases associated with the Omicron wave meant ongoing supply issues and labor shortages were exacerbated by renewed pandemic related containment measures.”
Eurozone economy barely grew in the fourth quarter as Omicron dampened activity
The Eurozone economy grew by 0.3% in the fourth quarter of 2021 compared to the end of the third quarter. This is broadly in line with expectations and represented a slowdown in growth most easily explained by the imposition of fresh restrictions to curb COVID cases in, for example, Austria and Germany. This slowdown can be seen as largely transitory as it is likely that COVID restrictions will be removed in the coming months as the Omicron wave subsides. The ECB will be under little pressure to tighten monetary policy and raise interest rates while growth remains relatively subdued.
Markets continued to focus on the path of US monetary policy and the likelihood of a Russian invasion of Ukraine. The former saw further rotation from growth to value stocks in US equity markets, while the latter continues to drive strength in energy prices. Overall, the combination of these factors has caused a meaningful spike in the volatility of markets and greater dispersion of equity returns.
Energy companies continue to perform well on the basis that a Russian invasion will mean materially higher energy prices. On the other hand, expensive growth stocks continued to come under pressure from tighter monetary policy and deteriorating investor sentiment.
Regionally, UK and European equity markets are outperforming their US counterpart, a reversal of the US leadership that was so prevalent for most of last year.
Look out for next week’s update, where we’ll be focusing on monetary policy meetings and US non-farm payrolls.
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