A review of the week’s top global economic and capital markets news.
After dropping sharply on Monday, global equities reversed course and head into the Christmas holiday weekend higher on the week. The yield on the US 10-year Treasury note rose seven basis points to 1.46% from last Friday while the price of a barrel of West Texas Intermediate crude oil rose $2 to $73.20. Volatility, as measured by the Cboe Volatility Index (VIX) declined to 18.6 from 21.1 a week ago.
MACRO NEWS
Outlook clouds for additional US stimulus
News over last weekend that US Senator Joe Manchin (D, WV) would not support President Joe Biden’s Build Back Better package of social and climate programs has clouded the outlook for additional fiscal stimulus in 2022 and beyond. Manchin had maintained a hardline that the bill should not exceed $1.75 trillion in new spending over 10 years and must be fully funded by tax increases to gain his support. With the cost of the Biden plan estimated at between $3 and $4.5 trillion and containing several provisions to which he objected, Manchin said he would not support the bill. Efforts are now underway to produce a slimmed-down program, though that plan could run into opposition from the progressive wing of the Democratic Party. After news of the bill’s legislative demise, economists have begun to revise lower their 2022 US GDP estimates.
As Omicron spreads, responses vary
Given that lockdowns have largely proven expensive and relatively ineffective in controlling the spread of the coronavirus, many governments are trying to avoid taking the most severe steps to restrain the spread of the Omicron variant. In the US, event cancelations and postponements are becoming widespread, but relatively few harsh restrictions have been put in place. The Biden administration is emphasizing the importance of vaccinations and boosters to limit the severity of infections while announcing plans to distribute 500 million at-home test kits to American households and support overwhelmed hospitals with federal medical personnel, where needed. Harsher restrictions have been undertaken in many European countries, however, with the Netherlands the latest to reenter lockdown. Given Omicron’s high transmissibility, concerns are growing that a fresh wave of the virus in China could further tangle global supply chains, a fear that gained traction after Chinese authorities order the lockdown of Xi’an, a city of 13 million people, on Thursday after an outbreak. On a brighter note, two studies released this week from Scotland and South Africa suggest the Omicron variant tends to result in markedly lower risk of hospitalization than earlier ones.
European energy prices extend surge
With 30% of France’s nuclear power generation capacity expected to be offline in January for unexpected maintenance and natural gas supplies from Russia limited, European energy prices surged to record highs this week. The price surge has resulted in cuts in industrial output, particularly for energy-intensive industries such as metals smelting and fertilizer production. Second round effects are feared as rising input costs for things such as fertilizers could raise food prices for European consumers down the road while rising heating and lighting bills could put a big dent in consumers’ discretionary income, hampering the recovery from the pandemic.
Record US buybacks show no sign of letup
Thanks to solid corporate cash flows, share buybacks and dividend increases are expected to accelerate in 2022, the Wall Street Journal reports. In 2021, repurchases by members of the S&P 500 are expected to reach $850 billion, up 16% from prepandemic levels. A proposed 1% excise tax on share repurchases would not dissuade continued buybacks, companies said.
China cuts rates
Amid slowing economic growth, the People’s Bank of China this week cuts its one-year loan prime rate by 0.05%. While the magnitude of the reduction is small, analysts contend the signal the cut sends, along with other measures being undertaken to support the economy, is a powerful one and to expect additional cuts in 2022.
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The US Federal Reserve’s favorite inflation measure, the core personal consumption expenditures price index, rose 4.7% in November, more than double the central bank’s 2% target and up from October’s 4.2% reading. Consumer spending rose 0.6% in November, slower than October’s 1.4% while personal income rose 0.4%.
The US Walter Reed Army Institute of Research revealed it has developed a vaccine that it believes will be effective against COVID-19 and all its variants. Phase 1 human trials wrapped up this month with positive results, but the shot still faces phase 2 and 3 trials.
After month of lira weakness resulting from extremely unorthodox monetary policy, Turkish President Recep Tayyip Erdogan unveiled a lira rescue package to incentivize bank depositors to keep their deposits in the Turkish banking system. The move resulted in a 15% short-covering rally in the beleaguered currency.
To stimulate flagging economic growth, Japan’s Diet this week enacted a $315 billion supplemental budget.
According to the US Census Bureau, due to the effects of the pandemic, the US population rose a record-low 0.1% in 2021. The pandemic also took a heavy toll on life expectancy, the US Centers for Disease Control and Prevention reported this week. The sharpest decline since World War II saw life expectancy in the country cut by 1.8 years to 77 years.
The British economy grew 1.1% from the prior quarter in Q3, a downward revision from an earlier 13% estimate. However, revised figures show that the economy stands only about 1.5% below its prepandemic level, compared with an earlier 2.1% approximation.
On Wednesday, the US Food and Drug Administration granted an emergency use authorization for Pfizer’s COVID-19 pill Paxlovid, the first medication that newly infected high-risk patients can take at home.
US existing home sales rose 1.9% in November, the fastest pace since January.
The global mergers and acquisitions boom continued in 2021 with a record $5.7 trillion in deals struck through 21 December, according to Refinitiv.
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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