Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
Federal Reserve minutes reaffirm inflation concerns
The minutes from the February US Federal Reserve (Fed) meeting confirmed that members of its policy-setting committee remain concerned about the path of inflation. There was broad agreement that, “uncertainty regarding the path of inflation was elevated and that risks to inflation were weighted to the upside”.
The comments were specifically linked to three risks: supply chain disruption resulting from China’s Covid-19 policy; the likely effect on energy markets of a Russian invasion of Ukraine; and persistent wage growth that could trigger an inflationary spiral. These views were broadly unchanged from the Fed’s January meeting and therefore had relatively little impact on markets, which instead focused on two other aspects of the minutes.
The first was that “some participants commented that financial conditions might tighten unduly due to a rapid removal of accommodation”. This highlights concern that rapid increases in interest rates could lead to a slowdown in economic momentum and, potentially, a recession. Secondly, the omission of any reference to a much-anticipated 0.5% rate hike was taken as a sign that the Fed does not yet consider this to be a viable option. Prior to the meeting, the market had been pricing in a greater than 50% chance of a 0.5% hike being announced at the Fed’s March meeting.
Markets reacted positively to both points, causing a bounce in stock markets and a steepening in the yield curve.
UK services activity accelerated in February as fears of Omicron dissipated
The UK services PMI survey jumped from 54.1 to 60.8 in February, reaching an 8-month high and far exceeding economists’ expectations of a rise to 55.5. The rebound was led by consumer spending on travel, leisure and entertainment following the Omicron-led disruption over December and January.
There were also signs of supply chain improvement in the manufacturing sector, a closely-watched inflation indicator. Delivery times were the most favourable since November 2020 and firms reported fewer material shortages and an easing of global supply chain pressures.
However, the weak point in UK economic activity continues to be export demand, which has fallen for five out of the past six months. This stands in stark contrast to Europe, where export demand is healthy, suggesting that Brexit may be continuing to have a negative effect on UK trade.
Geopolitical tensions continued to dominate markets last week as conflicting interpretations of Russia’s build-up of armed forces on Ukraine’s borders added to uncertainty among investors.
How events will play out in Ukraine is extremely uncertain and, as a result, markets generally sought the refuge of safe havens, while selling riskier assets. Global equity markets moved lower, led once again by the higher valuation end of the market.
Gold was up marginally over the week, while oil prices fell in response to rumours of an imminent deal between the US and Iran that would see a further 4mn barrels of oil per day enter the global oil market.
Look out for next week’s update, where we’ll be focusing on Fed minutes and European inflation.
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