Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
US inflation reaches highest level in 13 years as prices rise 5%
May’s inflation data showed that US consumer prices have risen by 5% over the last year, representing the highest surge in prices since August 2008. The data also showed that the effect went beyond the base effects of higher energy prices that have been highlighted as causing a transitory increase in prices. The core-price index, which excludes volatile elements such as food and energy prices, increased by 3.8% over the year. For this reading, this is the largest increase since June 1992. Underpinning this increase was a 7.3% jump in the price of used cars and trucks from the previous month. Prices of furniture, airline fares and apparel also rose sharply in May.
Attention now turns to the upcoming Federal Reserve meeting where economists and investors will be monitoring any language concerned with the potential tightening of monetary policy. Crucially, although prices are now rising and the Fed is mandated to ensure price stability, the labour market is still some way off its employment goals.
UK economy grows by 2.3% in April as shops reopen
Unsurprisingly, growth was driven by consumers spending more on the high-street as non-essential shops reopened. Notably, there was also increased demand for caravans and cars – perhaps indicative of an increased appetite for ‘staycation’ holidays. Construction activity fell in April although it remains above its pre-pandemic peak. Overall, the UK economy remains 3.7% below its pre-pandemic peak.
ECB maintains accelerated pace of PEPP purchases for another quarter
The ECB maintained its dovish stance and continued to run central bank asset purchases at a slightly elevated rate. The ECB President Christine Lagarde was decidedly dovish in her communication of financial conditions, pointing to the concern that higher Government bond yields may feed through into tighter financing conditions for the corporate sector.
This contrasted the ECB’s forecast for GDP growth which was raised from 4.0% to 4.6% for 2021. The inflation forecast received a modest upgrade to 1.9% for 2021 but remains below the ECB target. President Lagarde was careful in distinguishing the inflation pressures in the US and Europe. The position will next be reviewed along with the outlook for inflation in September.
G7 Summit used to demonstrate unity by leaders
Leaders of the G7 nations, which includes Canada, France, Germany, Italy, Japan, the US and the UK, congregated at the G7 summit held in the UK last week. The group discussed topical issues including, funding for global vaccinations, dealing with China and financing ‘clean, green’ projects.
Perhaps the most significant takeaway from the weekend was the general harmony between leaders, in contrast to the acrimony of previous meetings with President Donald Trump in attendance. President Biden used the opportunity to declare that “the US is back”.
Markets
The yield on the 10-year US Treasury fell to nearly 1.4% last week after several months of trading sideways following the peak of roughly 1.75% in March. That’s likely a result of increasingly hawkish rhetoric from US President Joe Biden towards China. As a result, equity markets struck a more cautious tone last week as investors seek to balance the competing forces of higher inflation expectations with dogmatic central bank dovishness. Overall, global equities were up over the week and financial stocks underperformed. The oil price continued to rise following the communication from OPEC+ last week.
Look out for next week’s update, where we’ll be focusing on UK inflation and the FOMC committee meeting.
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