“Busy week for Central Banks…”

FED to end Bond Purchases in March

Following its two-day policy meeting, the FED indicated that its inflation target has been met and announced the end of the bond purchases in March paving the way for a three quarter-percentage-point interest rate increases by end of 2022 as the economy nears full employment and the US central bank copes with surging inflation. Annual inflation has been running at more than double the FED’s target in recent months.  During his news conference FED Chair Jerome Powell came out with an upbeat tone about the US economic recovery and expressed his willingness to raise interest rates to control inflation.  He further said “The economy no longer needs increasing amounts of policy support.” After the end of the meeting Powell said the pace of inflation is uncomfortably high and “in my view, we are making rapid progress toward maximum employment” a convincing situation for all FED officials even the most dovish.  The FED acknowledged that the health crisis is still underway with the new variant adding to the uncertainty about the course of the economy.    

European Central Bank

Whilst pressure is increasing on the ECB to follow its global peers in withdrawing the support policies the EBC will cut bond purchases under its 1.85 trillion Euro Pandemic Emergency Purchase Programme next quarter and will wind down the scheme next March.  It will, however, ramp up bond purchases under the Asset Purchase Programme (APP) keeping the ECB active in the market.  It will double bond purchases to 40 billion euros under the APP in the second quarter before cutting them to 30 billion euros in the third quarter.  From October onwards, purchases will be maintained at 20 billion euros, for “as long as necessary” to reinforce the accommodative impact of its policy rates, it said.  The ECB also stated that the cash maturing from its emerging scheme will be reinvested until the end of 2024, a year longer than previously planned, and the funds will be spent flexibly to help markets in stress.   

The Bank of England

The Bank of England on Thursday became the first major central bank to raise interest rates and warned that inflation was likely to reach 6% in April, three times its target level.  Whilst surprising investors for the second time in six weeks, the BOE said it had to act even though the Omicron virus is impacting Britain, as it sees warning signs in underlying inflation pressures.  The nine-member Monetary Policy Committee voted 8-1 to raise the Bank rate to 0.25% from 0.1%.  Governor Andrew Bailey said “We’re concerned about inflation in the medium term.  And we’re seeing things now that can threaten that.  So that’s why we have to act.”  He further said that it was unclear whether Omicron would ease or add to inflation pressure, “and that’s a very important factor for us” , he said.  Thursday’s hike rate has put the BOE ahead of the US Federal Reserve which on Wednesday said it was speeding up a phase-out of its bond-buying stimulus as a first step prior to possible interest rate rise in 2022.     

Eurozone Business

Eurozone Business Growth slowed more than expected this month amid imposed restrictions to curb the Omicron coronavirus variant that impacted recovery of the dominant services industry showed a survey on Thursday.  IHS Markit’s Flash Composite Purchasing Managers’ Index a good indicator of overall economic health, dropped to 53.4 in December, its lowest since March.  This headline was dragged down by the services PMI which sank to an eight-month low of 53.3 from 55.9 whilst above the 50-mark separating growth from contraction.  Growth in the demand for services dropped to its lowest since April when it contracted, with the new business index dropping from 54.2 to 52.6.  In the German private sector growth eased as the restrictions impacted the services sector showed earlier data.  In France, Europe’s second biggest economy and the only other country in the bloc to report flash data, activity expanded at a slower pace, a trend partly due to the new COVID-19 variant. 

UK Inflation

Consumer price inflation in the UK climbed to its highest in more than 10 years in November increasing to 5.1% from the 4.2% in October.  The Office for the National Statistics said, the increase in price pressure was attributed to a broad range of goods and services particularly petrol, clothing and footwear.  The International Monetary Fund predicted on Tuesday that British inflation might reach around 5.5% in the second quarter of next year, its highest in 30 years and has warned the Bank of England not to give in to “inaction bias”.  Meanwhile, internationally, inflation has risen much faster than economists expected this year, due to higher energy prices and COVID-related supply-chain bottlenecks.  In Britain, post-Brexit trade and migration barriers have also caused problems.  Core CPI, which excludes more volatile energy, food, alcohol and tobacco prices, rose to 4% from October’s 3.4%, the highest since 1992.  The long-running retail price inflation (RPI) measure rose to 7.1% from 6% its highest since March 1991. 

US Producer Prices Soar

US producer prices increased more than expected in November amid the persistent supply constraints. The report from the Labour Department on Tuesday which followed on the strong growth in underlying producer inflation, followed the news from the previous Friday that annual consumer prices surged by the most since 1982 in November.  Soaring inflation complicates the economic agenda of the President Joe Biden, including the $1.75 trillion social policy and climate bill.  Meanwhile, the producer price index for final demand jumped 0.8% last month after advancing 0.6% in October.  The broad-based increase in the PPI was led by a 0.7% rise in services, which followed an 0.2% gain in October.  Price increases occurred for hotel and motel accommodation as well as airline fares and transportation of freight and mail.  Wholesale goods prices rose 1.2% after increasing 1.3% in October. Prices for iron and steel scrap rose 10.7%.  There were also increases in wholesale gasoline and food prices.  However, prices for diesel fuel dropped as did the cost of light motor trucks.  

US Retail Sales

US Retail sales increased less than expected in November at a rise of 0.3% last month, said the Commerce Department on Wednesday.  Data for October was revised higher to show retail sales surging by 1.8% instead of 1.7% as previously reported.  Sales have now risen for four straight months.  Support from the governments related to the COVID-19 pandemic which ran into trillions of dollars, supported the demand for goods that were strained by supply chains.  Shortages raised the prices of goods ranging from motor vehicles, to furniture and electronics.  Consumer prices increased by a solid 0.8% in November, with the year-on-year gain of 6.8% the largest since June 1982.  Meanwhile, excluding automobiles, gasoline building materials and foods services, retail sales dipped 0.1% after accelerating 1.8% in October.  These so called core retail sales correspond most closely to the consumer spending component of gross domestic product.  Consumer spending which accounts for more than two thirds of the US economic activity increased by 1.7% annualised rate in the third quarter.    Economic growth estimates are as high as an 8.7% rate. The economy grew at a 2.1% pace in the third quarter.

Market Wrap

Monday saw US markets closing lower with the Dow Jones Industrial Average closing at 35,650.95 lower by 0.89%, NASDAQ 100 closed lower by 1.53% to reach 16,082.55 and the S&P 500 closing lower by 0.91 to 4,668.97.  Meanwhile, in Europe markets closed lower with the CAC 40 closed at 6,942.91 lower by 0.7% and the DAX dropped by 0.01% to 15,621.72. Meanwhile FTSE 100 closed lower by 0.83% to close at 7,231.44.   

Tuesday saw the markets dropping further with the Dow Jones Industrial Average closing lower by 0.3% to 35,544.18, NASDAQ 100 closing lower by 1.04% to reach 15,914.9 and the S&P 500 closinglower by 0.75% to 4,634.09.  European markets also followed a downward trend with the CAC 40 closing lower by 0.69% to close 6,895.31, the DAX reached 15,453.56 lower by 1.076% and the FTSE 100 closed lower by 0.18% to close at 7,218.64.  Pfizer Inc on Tuesday said that its antiviral COVID-19 pill showed near 90% efficacy in preventing hospitalizations and deaths in high-risk patients, and recent lab data suggests the drug retains its effectiveness against the fast spreading of the Omicron variant of the coronavirus. 

European shares moved higher on Wednesday ahead of the US Federal Reserve’s policy that indicated a faster withdrawal of the pandemic stimulus measures in place to combat inflationary risks. The pan-European STOXX 600 was up 0.5% at 471.84 points.  Stock markets across Asia dropped amid China’s weaker-than-expected retail sales in November that dented sentiment.  Tech, utility and auto sectors supported the index while miners and energy stocks dropped. Meanwhile in the US all three main US indexes reversed earlier losses and climbed in positive territory.  The S&P 500 rose sharply on Wednesday with 1.63% at 4,709.85 erasing almost all of its losses from earlier this week and left just short from its record-high close on Friday.   The Dow Jones Industrial Average closed higher by 1.08% to close at 35,927.43 while the NASDAQ 100 closed higher by 2.35% reaching 16,289.59.  The volume on the US Exchanges was 12.2 billion shares, strong compared with the 11.6 billion average over the past 20 trading days.

Asian stocks on Thursday rose after the long-awaited end to the FED’s monetary policy stimulus next year.  Japan’s Nikkei climbed 1.91% and touched a three-week intraday high.   Meanwhile in the US the Dow Jones Industrial Average dropped by 0.08 closing at 35,897.64, the NASDAQ 100 had the highest drop of 2.61% compared to the Dow Jones and the S&P 500 closing at 15,863.94.  The latter closed lower by 0.87% at 4,668.67.  Meanwhile, European markets closed higher on Thursday with the CAC 40 closing higher by 1.118%, the DAX closed higher by 1.034% to close at 15,636.40 while the FTSE 100 closed higher by 1.25% to close at 7,260.61. 

Currency Roundup

Sterling

Tuesday saw sterling rising on the news about inflation but was little changed compared to the level it was prior to the release of data. Wednesday saw sterling trading at $1.12350 as Britain faces rising cases of the Omicron variant of the new coronavirus.  Against the struggling dollar sterling climbed by 0.4% to $1.3282, its highest level since 7 December.  Against the euro it edged 0.2% higher to 84.94 pence.  Meanwhile data released on Wednesday showed that consumer price inflation had surged to its highest in more than 10 years in November. Thursday saw sterling climbing after raising interest rates.  It rose 0.7% to a two-week high of $1.3368 after the BOE raised its main interest rate to 0.25% from a historic low of 0.1%. 

US

The dollar held to its recent gains in Asian trading on Wednesday as investors awaited key Federal Reserve policy meeting for any additional rate increases next year.  The dollar index which measures the greenback against six major peers was at 96.557 after having gained 0.5% so far this week in choppy trading, testing last week’s 96.954.  Whilst the gains in the dollar have been broad, daily moves were muted ahead of the FED decision. Tuesday saw trading near a one week high against a basket of major currencies, bolstered by the producer price data. 

EUR

EUR traded last at $1.1264 not far from $1.1184 hit in November, which was its lowest in over a year.  The euro with sterling jumped on Thursday after the Bank of England was the first mover to raise interest rates since the beginning of the pandemic, while the European Central Bank said it would continue with its withdrawal of bond purchases.  The euro rose 0.35% to $1.13350 after the ECB said it will cut bond purchases under its 1.85 trillion euro Pandemic Emergency Purchase Programme ending the scheme as expected in March. 

Oil

Oil futures prices dropped on Tuesday after the International Energy Agency (IEA) said the Omicron coronavirus variant is set to erode global demand recovery.   Brent crude futures fell 0.9% to $73.70.  US West Texas Intermediate (WTI) crude futures settled down by 0.8% at $70.73.  Oil prices rose on Thursday amid the US implied consumer petroleum demand that surged to a record high.  Brent crude oil futures rose by 72 cents or 1% to $74.60 a barrel while US West Texas Intermediate crude futures increased by 1.1% to $71.66.  According to US Energy Information Administration showed US crude inventories sank by 4.6 million barrels in the week to 10 December.   

Gold

Gold prices stabilised near a two-week low on Wednesday as investors awaited the FED’s action on the pace at which the central bank plans to taper its pandemic stimulus measures.  Spot gold was little changed at $1,769.50 per ounce while US gold futures dropped 0.2% to $1,769.60.  Reduced stimulus and interest rate hikes tend to push government bond yields up raising the opportunity cost of holding gold which earns no interest.  Gold was boosted on Thursday by a drop in the US dollar, after the FED decided to end its pandemic-era bond purchases early next year.  Spot gold was 0.5% higher at 1,785.60 per ounce while US gold futures jumped 1.3% to $1,788.10.

Malta:  Harmonised Index of Consumer Prices (HICP) – November 2021

A press release dated 17 December, 2021 shows that in November, 2021 the annual rate of inflation as measured by the HICP was 2.4% up from 1.4% in October, 2021.  The largest upward impact on annual inflation was measured in the Food and non-alcoholic beverages Index (0.74%), while the largest downward impact was recorded in the Communication Index (-0.08%). 

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