Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
US inflation continues to climb
US inflation, as measured by the Consumer Price Index, rose again in May, up by 1% and exceeding expectations for a 0.7% rise. This brings the annual US inflation figure to 8.6%. Perhaps most concerning for investors and consumers is that core inflation, which strips out energy prices, rose 0.6%, indicating a broadening and persistence of price increases. Perhaps unsurprisingly, airline fares saw a dramatic increase of 12.6% month-on-month. New and used vehicle prices also increased, up 1% and 1.8% respectively, while rent and mortgage costs increased by 0.6%.
Food prices are going up as shocks to global food supply chains and rises in energy and fertiliser costs feed through to consumers. Restaurant and grocery prices are moving higher, but recent rises in the price of food consumed at home are particularly strong, climbing by more than 1% per month.
The University of Michigan’s long-term inflation expectation measure reached one of its highest levels since records began in the mid-1990s. The index suggests that inflation will remain at 3.3%, well above the US Federal Reserve’s (Fed’s) target of 2%. Adding to investor concerns, the University of Michigan Consumer Sentiment Index hit an all-time-low this month, far below consensus estimates.
UK GDP data adds to recession concerns
Despite a consensus estimate of a 0.1% rise, UK GDP fell 0.3% in April. The UK economy has not grown since January and there is a strong possibility that it will enter a recession.
The largest contributors to the decline in GDP were the manufacturing sector, down 1%, and construction, which fell 0.3%. Of particular concern is that net exports have subtracted 4.1% from UK GDP in the first quarter of this year.
Expectations of a recession are often disinflationary and prompt central banks to cut rates, but the current economic environment is unusual. Given the continuing surge in prices – particularly in fuel and energy – it is unlikely that the Bank of England will be able to reduce interest rates in the near future.
ECB signals rate rises
The European Central Bank (ECB) adopted a more hawkish tone at its June policy meeting. We are likely to see a 0.25% interest rate rise in July, followed by a 0.50% increase in September, unless there is a marked improvement in the euro zone inflation outlook over the coming months. Looking beyond September, the ECB is committed to ‘sustained’ rate rises, albeit at a ‘gradual’ pace.
Whilst euro zone inflation is high, hitting 8.1% year-on-year in May, Europe is not experiencing the same labour market tightness and associated wage inflation as the US and UK. This could change, however, and the euro zone’s dependence on Russian gas leaves it particularly exposed to further inflationary shocks due to the war.
Market review
It was another negative week for global markets. Continued price increase momentum, combined the prospect of further increases in gasoline prices, spooked markets and sparked declines across the board. Investors are concerned that the need to tame inflation will force the Fed to raise rates more aggressively than expected.
Growth stocks were particularly badly hit, but equity market declines were broad-based, with the tech-heavy Nasdaq and the MSCI All Countries World Index finishing the week down over 10% and 8.3% respectively.
Bondholders also suffered, with the two-year US Treasury yield rising above 3% for the first time in 14 years as investors digested the reality of persistently high inflation, aggressive rate rises and lower growth expectations.
One of the few areas of markets to show positive returns was oil, where rising prices pushed the Brent Crude benchmark up 2.3%.
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