Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
European inflation hits new highs, prompting hawkish tilt from ECB
Contrary to expectations, European consumer price inflation continued to increase in January, rising by 0.1% to 5.1% year-over-year. Once again, the driving force was energy prices, followed by food. By contrast, core inflation, which strips out the effects of volatile food and energy prices, fell from 2.6% to 2.3% year-over-year.
In comments following the data release, ECB President Christine Lagarde noted that price pressures were more widespread than expected and that the ECB has a role to play in preventing consumer expectations creating an inflationary spiral. She also noted the ECB Council’s “unanimous concern” over the current inflation outlook. This departure from previous rhetoric, which characterised price increases as ‘transitory’, suggests that the ECB may be more open to raising interest rates in 2022.
Surprise rise in US employment reveals that companies continued to hire, despite Omicron
The US economy added 467,000 jobs in January compared an expected 125,000. The report also revised up employment growth for November and December by a total of 709,000 jobs. This brings overall US employment to within 2.9m of its pre-pandemic peak, and unemployment down to 4.0%.
The strength of the US labour market suggests robust economic momentum, which is reassuring for central bankers and economists who are concerned about potential effects of tighter monetary policy on economic growth. The Fed is expected to raise interest rates in March.
Bank of England raises interest rates to 0.5% and UK energy bills to rise by 54%
As expected, the Bank of England raised interest rates from 0.25% to 0.50% last week. However, Monetary Policy Committee (MPC) minutes revealed a surprise vote by four of the nine members in favour of a larger increase to 0.75%.
The MPC also voted to stop reinvesting the proceeds of maturing UK government bonds, a move that marks the beginning of passive quantitative tightening by effectively withdrawing liquidity from the financial system. Finally, the MPC announced plans to sell its £20bn stock of corporate bonds. This a relatively small amount in the context of the sterling corporate bond market, but it highlights the BoE’s resolve to reduce its balance sheet.
The BoE’s interest rate rise was accompanied by news that Ofgem, the UK energy regulator, will increase its energy price cap by 54% in April to reflect higher spot prices in the natural gas market. This will add to inflation and put further pressure on the BoE to tighten policy. However, the rise in the energy price cap will be mitigated by £9bn of government spending and loans designed to cushion the blow for consumers. The measures include loans to energy suppliers to reduce household bills, a council tax rebate and a discretionary fund for local councils to help lower-income households that do not pay council tax.
Equity markets focused on company earnings last week. Against the backdrop of recent market volatility and heightened policy uncertainty, poor results were punished severely. In one day, Facebook’s market capitalisation fell by $232bn (c.25%) after poor results highlighted increasing competition for its main social media platforms from TikTok.
PayPal and Netflix also experienced harsh share price reactions after posting worse-than-expected guidance, while Spotify sold off on concerns over its handling of vaccination misinformation on its streaming platform. These incidents point to a broader trend in the past month whereby highly valued companies, usually in the information technology sector, are coming under increasing scrutiny.
Energy companies continued to perform well last week, reflecting higher energy prices. Energy is by far the best performing sector for the year to date.
Elsewhere, the 10-year US Treasury yield broke 1.9% for the first time since 2019, while yields on 10-year gilts rose to above 1.4% for the first time since 2018.
Look out for next week’s update, where we’ll be focusing on US inflation and Chinese PMI data.
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