Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
Federal Reserve Chairman pivots outlook on inflation, warning of faster ‘taper’ of asset purchases
US central bank chairman Jerome Powell signalled his support for a faster reduction of central bank bond buying last week, in an effort to tackle inflation. Powell promised to tackle ‘persistently higher inflation’ and suggested that the word ‘transitory’ be ‘retired’. He did acknowledge that the emergence of the Omicron variant was not yet included in the Fed’s forecasts. This is in stark contrast to previous comments on the transitory nature of prices rises and his commitment to let inflation run above target for some time.
Investors were surprised by the statements but seemingly weren’t ready to believe them given uncertainty over the Omicron variant. US Treasury yields broadly fell after the announcement while the commitment to raise rates despite the potential threat from Omicron was received negatively in equity markets.
US data sends mixed signals on the trajectory of economic recovery
ISM PMI data, which indicates how optimistic or pessimistic US business managers are feeling, surprised to the upside in November, presenting a very favourable outlook on the position of manufacturing and services businesses. The services PMI rose dramatically from 66.7 to 69.1, which is an all-time high and well in excess of the moderate slowdown expected by economists. The ISM noted that ‘demand continues to outpace supply’ due to capacity constraints, labour shortages and logistical challenges. The manufacturing component remained in expansionary territory in line with expectations.
In contrast, however, US non-farm payrolls data showed that US economy added 210,000 jobs in November, short of the 573,000 expected. Although this is unlikely to be a result of the new COVID variant, Omicron, it is likely that businesses are pausing their hiring in anticipation of the winter months and a potential resurgence in cases. Leisure and hospitality jobs only expanded moderately in November. The news of Omicron, which occurred in late November, is likely to exacerbate this uncertainty and lead to a further slowdown in hiring.
European inflation hits all-time high in November
Eurozone inflation rose by 4.9% in the year to November, up from 4.1% in October and the highest level on record. Energy price inflation continued to be the driving factor behind higher prices although prices rose across most sectors. Regionally, headline inflation was highest in Germany, at 6.0%. Perhaps more striking was the move higher in core inflation, which strips out the effects of volatile price elements such as food and energy. This measure showed that core price inflation rose from 2.0% to 2.6%, ahead of expectations of an increase to 2.3%. This demonstrates the effect that ongoing supply chain disruption and increasing producer price costs, linked to commodity prices, are feeding through into what could be considered more sustainable inflation.
Nevertheless, the ECB President Christine Lagarde commented that the ‘inflation we’ve seen is tied to temporary phenomena’ indicating that central bank action remains unlikely at this stage. Moreover, with the drop in oil prices over recent weeks it could be suggested that November marked the high point for inflation if energy prices abate from here.
Uncertainty surrounding the Omicron variant dominated markets last week, with incremental news flow leading to dramatic swings in equity markets, driving equity volatility to its highest levels of the year as the VIX reached 30.7. Although we still have relatively little information about Omicron, investors are concerned that the variant might increase supply chain disruption, leading to higher inflation and forcing central banks into removing the ample liquidity that has supported them since March last year.
US technology stocks were amongst the worst affected, with the NASDAQ index falling by 1.8% on Friday alone. Oil prices continued to moderate and government issued debt continued to perform well.
Look out for next week’s update, where we’ll be focusing on the US inflation and European consumer expectations.
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