Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
Fed hikes rates for the first time since 2018
The US Federal Reserve (Fed) announced its first rate rise since 2018, lifting the Fed funds rate by 0.25% to 0.5% and indicating that a series of six further hikes are to come this year. Chairman Powell remarked that the US economy is in good shape and that he does not see the chances of a US recession as ‘particularly elevated’.
With US inflation rising at its highest pace in four decades in February, the rate rise had been widely expected, despite lower GDP growth projections. However, Chairman Powell’s reassuring comments and one more hawkish vote to increase rates by 0.5% rather than 0.25% caused US stock markets to rally, erasing some of their recent losses. Investors interpreted the more hawkish tone as a sign that the Fed will move decisively to control inflation. The tech-heavy Nasdaq to record its best day since November 2020 with a rise of 3.8%.
BoE increases base rate but signals a dovish outlook as they aim to balance growth and inflation
As widely expected, the Bank of England (BoE) also raised interest rates last week by a quarter of a point, to 0.75%. They have now raised rates by 65 basis points since their low point in 2020 and have also started quantitative tightening (QT) to reduce economic stimulus and curb inflation. For the moment, QT will take the form of a passive reduction in the BoE’s balance sheet, with maturing debt being withdrawn rather than reinvested. In this way, liquidity is being withdrawn from the system.
In contrast to the Fed, the BoE surprised investors by striking a more dovish tone, indicating there was some doubt over the rate of further monetary tightening. One member of the Bank’s Monetary Policy Committee (MPC) voted to maintain rates, indicating the fine balance between growth and inflation that the BoE is trying to maintain.
The Bank now expects CPI to rise to around 8% in Q2 2022, with the possibility of further rises in October once the household energy price-cap is lifted again. The MPC also voiced concerns that the squeeze on real incomes might subdue consumer demand.
Whilst the BoE has raised rates and implemented quantitative tightening at a faster rate than its US counterpart, the £28bn worth of gilts that it has allowed to roll off its balance sheet and other redemptions due this year will have a limited impact on the Bank’s balance sheet unless it starts to sell gilts.
Chinese equity markets rally despite concerns over COVID-19 lockdowns and ADR withdrawals
The Chinese market rallied, with the MSCI China up +13.4% last week. However, year-to-date it is still down almost 15%. Chinese stocks have suffered in recent quarters for a number of reasons.
Firstly, the government regulatory crackdown that began in 2021 has proved particularly detrimental to the large tech stocks that comprise a significant proportion of the market. Meituan is the latest company to be hit, with new regulations requiring it to reduce service fees charged to restaurants.
Secondly, there are growing concerns that the US financial regulator, the SEC, is moving closer to banning the listing of Chinese companies in US markets via American depositary receipts (ADRs). The US and Chinese governments have been in a dispute for almost ten years regarding the access that US regulators have to audit Chinese companies. With no resolution reached, Chinese companies listed via ADRs in the US could be de-listed as soon as next April.
Thirdly, President Xi’s friendship with President Putin has stoked fears that China may be subject to sanctions if they assist Russia in the Ukraine war.
Finally, China’s zero-COVID policy is facing new challenges due to the highly infectious Omicron variant, which has become widespread across the country and led to large-scale lockdowns. The country’s relatively low vaccination rate and underprepared healthcare system have raised concerns that China will need to double-down on its lockdown policy, which could stifle economic growth.
All major equity markets had a positive week. Investors were buoyed by hopes that a peace deal between Ukraine and Russia could be reached, and that major central banks would be decisive in their efforts to curb inflation. Tech stocks, which have generally performed poorly this year, were the biggest winners as confidence grew that central banks will act to tame inflation.
Gold prices fell as the flight to safety often seen at the start of a crisis settled down. Commodity prices remained elevated, with Brent Crude ending the week above the $100 mark again at $115.
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