Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
Volatile energy markets buffeted by Ukraine conflict and economic sanctions
The price of oil (Brent Crude) rose to its highest since 2008 last week as the nature of the conflict in Ukraine deteriorated. Since the start of the year, the price of oil is now up over 60%.
The reluctance of commercial cargo ships to transport Russian oil initially resulted in a divergence between the Brent Crude global oil price and Russian Urals price, which usually track very closely. Political turmoil in Libya added to market stress as militia groups shut down the country’s largest oil field. Despite the release of strategic oil reserves by the US and others aimed at tackling these difficulties, oil prices continued to rise throughout the week, as concerns rose over the possibility of sanctions on Russian energy by the US and Europe. Fear of sanctions also helped to drive natural gas prices to new highs, although the impact is mostly limited to Europe, which sources a high proportion of its gas from Russia.
Ultimately, rising energy prices are the greatest risk to global economic growth from the war in Ukraine. If persistent, they have the potential to increase and sustain inflation beyond its already elevated level, potentially destroying consumer demand and causing central banks to tighten at a faster rate. This final point has the potential to destabilise financial markets.
US jobs growth continues while wage growth moderates
The US economy added 678,000 jobs in February, well in excess of the 423,000 expected by economists. Although overshadowed by the conflict in Ukraine, the data illustrates that the US labour market is in good health, which should, under normal circumstances, necessitate the tightening of monetary policy. A tight labour market usually presages wage growth as employers compete for a dwindling pool of labour. However, US jobs data showed that wage growth slowed in February from 5.5% to 5.1% year on year. This is likely to be because of the types of jobs being added. As COVID-19 fears subside, many relatively low-paid leisure and hospitality job vacancies were being filled, thereby reducing the average increase in wages.
In response to the data, Jerome Powell, Chairman of the Federal Reserve (Fed), commented that the labour market was “extremely tight”. He added that the situation in Ukraine raises uncertainty about the economic outlook, but that he anticipates a series of rate hikes of 0.25% over the coming year, with the first likely to be made after the Fed’s March meeting.
Markets continued their risk-off trend last week as they digested the disturbing news from Ukraine. European equity markets were the worst effected, falling over 11% (EURO STOXX 50 Index). All major equity markets finished the week in negative territory with the exception of Brazil, which continues to recover from last year.
Looking beyond regions, two sectors have benefited from the war in Ukraine: energy, in response to the rising oil and natural gas price, and defence, as expectations grow for a prolonged period of government spending on defence.
Safe haven assets continued to provide refuge from drawdowns in equities. The gold price rose to above $2,000 and government bonds generally performed well.
Look out for next week’s update, where we’ll be focusing on fallout from the Ukrainian conflict and the ECB meeting.
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