A review of the week’s top global economic and capital markets news.
For the week ending 14 January 2022
As of noon on Friday, global equities traded little changed from week-ago, though well above the week’s worst levels. Rising real yields have presented a headwind for equities so far in 2022. The yield on the US 10-year Treasury note stabilized on the week after brushing the 1.80% level and now trades at around 1.74%. The price of a barrel of West Texas Intermediate crude oil rose to $82.65 from $79.15 last week while volatility, as measured by the Cboe Volatility Index (VIX), rose to 21.5 from 19.6.
MACRO NEWS
US inflation hits 40-year high
The US Consumer Price Index rose 7% year over year in December, the fastest pace since June 1982. Price gains remained broad-based, with autos and housing among the key contributors to the rise. December marked the third month in a row that inflation exceeded 6%. In his confirmation hearing before the Senate Banking Committee on Tuesday, US Federal Reserve Chair Jerome Powell calmed markets, expressing resolve on the fight against inflation without appearing panicked. He said that the Fed will work to make sure that inflation does not take root in the economy, and stated that prices will likely peak in mid-2022. It will take some time, between two and four FOMC meetings, for policymakers to sort through the analysis and composition of any measures to reduce the size of the Fed’s balance sheet, Powell testified, assuaging market fears that quantitative tightening could begin early in 2022. Investors expect rate hikes to begin at the March FOMC meeting, with as many as four increases priced in this year.
China speeds infrastructure projects to backstop growth
Ahead of an important Communist Party Congress this fall, Chinese officials announced plans to accelerate work on over 100 major infrastructure projects in a bid to keep the country’s growth rate above 5%. The move is designed to offset the economic drag from declining housing investment and still sluggish household demand. Among the areas targeted for investment include 5G telecom, renewable energy, transportation and social housing.
Omicron apparently peaking in New York, London
Following the pattern established in South Africa, the Omicron variant of the coronavirus appears to have peaked in both New York and London, with the number of new cases declining sharply in recent days. Wastewater studies in Boston come to a similar conclusion. While hospitalizations have risen sharply recently, the seven-day moving average of deaths is not accelerating. Officials in various localities are increasingly beginning to transition from a pandemic mindset to an endemic one with regard to their approach to the virus.
Poland sees risk of war as highest in 30 years
As talks between Russia, the US and NATO fail to progress, Polish Foreign Minister Zbigniew Rau says the risk of war in Eastern Europe is the highest it has been in 30 years. President Joe Biden’s national security adviser, Jake Sullivan, said the threat of military invasion is high. Russia is seeking assurances from the US and NATO that Ukraine will not be admitted as a member of the alliance and that missiles will not be based there. In the event Russia invades Ukraine, sweeping US sanctions against top Russian officials and the country’s banks are expected to be imposed.
QUICK HITS
US retail sales slumped 1.9% in December as consumers apparently heeded warnings to shop early amid ongoing supply chain disruptions. However, sales rose a robust 16.9% for the year thanks to strong consumer demand.
The US Conference Board’s CEO Survey showed that 82% of C-level executives surveyed expect continued upward pressure on input prices this year while 59% expect inflationary pressures to persist until at least mid-2023.
The US Supreme Court blocked the Biden administration’s vaccine-or-testing rules for large employers but allowed more leeway to impose vaccine mandates on health care workers whose facilities participate in Medicare and Medicaid.
The wind-down of global monetary stimulus has seen the pool of negative-yielding debt shrink from a pandemic high of around $18.5 trillion to $10 trillion dollars today.
The Wall Street Journal estimates as many as five million Americans have been quarantining this week due to Omicron, further disrupting the provision of medical services and tangling supply chains.
Fed Vice Chair Richard Clarida will resign today, several weeks short of the end of his term, after it was revealed he amended financial disclosure forms dating back to February 2020 during the early phase of the pandemic. The forms revealed that he sold three stock funds on 24 February only to buy one back on 27 February, the day before the Fed issued a statement saying it was prepared to cut interest rates to shore up the economy. That move raised ethics concerns, and comes on the heels of the resignation of two regional Fed presidents in recent months following questions over their personal trading.
Goldman Sachs estimates that if none of the provisions of President Biden’s Build Back Better agenda are enacted, 2022 US growth will likely be 0.5% lower than it otherwise would have been and 2023 growth 0.25% lower. However, the absence of tax hikes designed to offset some of the plan’s spending priorities should be supportive of equities.
The Financial Times reports that in the early days of 2022 companies have raised over $100 billion in new debt financing as they rush to lock in low rates before they rise.
European Central Bank President Christine Lagarde said this week that climbing prices are a cause for concern but that the ECB’s commitment to price stability is unwavering.
The World Bank trimmed its 2022 global growth outlook to 4.1% from 4.3%, citing COVID variants, inflation and rising income inequality. It estimates the global economy grew 5.5% in 2021.
The European Medicines Agency and World Health Organization said that frequent booster shots may be counterproductive. The EMA said that frequent shots may weaken the immune system.
On Friday, the Bank of Korea raised its policy rate 0.25% to 1.25%. Another quarter-point hike is possible in Q1 if the country’s recovery remains on track, the central bank’s chief said.
The economy in the United Kingdom exceeded its prepandemic size in November, the Office of National Statistics reported on Friday.
China’s trade surplus reached a record $94.5 billion in December, but officials expect it to slip in the future as demand for medical supplies and work-from-home equipment is likely to slow in 2022.
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The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.
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Sources: MFS earch, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
This content is directed at investment professionals only.
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