Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
US and UK central bankers signal their readiness to step in and manage inflation
Although the US Federal Reserve stopped short of announcing tapering at their August meeting, the shift in rhetoric was significant. Fed chairman Powell said that the Fed could “easily move ahead” with announcing a taper of its asset purchases at the meeting in November. The unexpected news came in the communication on the pace of the taper, which the Fed chair said could see asset purchases end by the middle of next year. Moreover, the Fed ‘dot plot’ – which shows where each committee member expects interest rates to be in coming years – indicated that half of the Fed rate-setters expect interest rates to start rising next year, sooner than originally thought.
At the Bank of England, the monetary policy committee voted unanimously to keep rates on hold but moved one step closer to tightening policy as two members of the committee voted to end the BoE’s bond buying programme. Moreover, the bank signalled that inflation could peak at 4% before the end of the year as higher gas prices and shortages of labour – such as the driver shortages currently leading to the undersupply of petrol – drive a temporary spike in inflation. In response to the more hawkish stance, investors moved to price in the first interest rate increase in the first half of 2022, having previously expected rates to be on hold until at least next summer.
Eurozone and UK economic momentum slows materially as price pressures continue to grow
The Eurozone composite PMI fell from 59.0 to 56.1 in September, compared to economists’ expectations of a moderation to 58.5. Both manufacturing and service sector momentum were markedly less than expected and lower than the prior month. In the service sector, there were falls in new business, outstanding business and business expectations. Meanwhile, the manufacturing sector experienced sharp falls in new orders and new export orders components. Although the data is disappointing and shows fading momentum, for the time being activity continues to expand.
The same indicator in the UK fell from 54.8 to 54.1, hitting a 7-month low on activity growth. The manufacturing PMI was the main factor in dragging down the headline composite indicator as it fell from 60.3 in August to 56.3 in September. Survey respondents highlighted material shortages and softening demand for new orders as the main contributory factors. Firms once again raised prices at a sharp pace to keep in line with higher input prices.
The China Evergrande saga continued last week as the indebted Chinese property developer missed an interest payment on some of its US-dollar-denominated debt. The People’s Bank of China appears to be starting to intervene by announcing that it will inject $71 billion into the banking system to assist with liquidity. The default is being closely watched by investors to discern the potential effects on the wider Chinese property market and economy as a whole, as well as a signal of the Chinese authorities’ willingness to support debt-distressed companies. For now, international investors have decided that the Evergrande situation is unlikely to cause major disruption beyond the Chinese property and credit market, as equity markets recovered last week.
The other market moving news last week came from the hawkish rhetoric at the Bank of England meeting. In response to the comments mentioned above, the 10-year gilt yield rose above 0.9% for the first time since 2019. Gilt yields have risen sharply over the last two months as higher inflation expectations have led investors to believe that monetary tightening may be brought forward.
Look out for next week’s update, where we’ll be focusing on the PMI survey data and European consumer confidence.
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