“FED Meeting…”

On Wednesday the Federal Reserve said it is likely to raise interest rates in March and reaffirmed its plans to end its bond purchases that month with Jerome Powell, the US central bank chief, pledging it will be a way to help tame away inflation. He further added that subsequent interest rate increases and an eventual reduction in the FED’s asset holding will follow as necessary.  He told reporters that much was left undecided, after the end of the FED’s latest two-day policy meeting, including the pace of subsequent rate hikes or how quickly officials will let its massive balance sheet decline.  Powell said that since the FED’s last policy meeting in December, inflation “has not gotten better.  It has probably gotten worse…. to the extent that situation deteriorates further, our policy will have to reflect that.”  He further added, “This is going to be a year in which we move steadily away from the very highly accommodative monetary policy we put in place to deal with the economic effects of the pandemic.” 

US Economic Growth

US Economic growth accelerated in the fourth quarter as businesses replenished, depleted inventories to meet strong demand for goods.  Gross domestic product increased at a 6.9% annualised rate last quarter, said the Commerce Department, in its GDP estimate on Thursday.  That followed a 2.3% growth pace in the third quarter.  The economy grew 5.7% in 2021, the strongest since 1984.  It contracted 3.4% in 2020, the biggest drop in 74 years.  Massive fiscal stimulus and lower interest rates contributed to growth.  The momentum however seems to have faded by December amid the rise in the COVID-19 infections which contributed to lower spending and the disruption of factories and service businesses.  The robust growth reached last year supports the FED’s approach in rising interest rates in March. 

Eurozone Economic Recovery

The economic activity recovery in the Eurozone decreased further this month amid restrictions to contain the Omicron variant that negatively impacted the dominant services activity as prices continued rising, showed a survey on Monday.  The IHS Markit’s Flash Composite Purchasing Managers’ Index, which is seen as a gauge of overall economic health, dropped to 52.4 in January from a 53.3 in December, its lowest since February.  That headline number was affected by the services PMI, that dropped to a nine-month low of 51.2 from 53.1, however, above the 50-mark separating growth from contraction.  The demand for services dropped as consumers stayed home.  The new business index sank to 50.8 from 52.5, its lowest reading since April last year just before parts of the economy reopened after a stricter lockdown.  Consumers also had to incur tighter prices. Factories are less affected by restrictions and have mainly remained open.  The manufacturing PMI rose to a five-month high of 59 from 58. 

Italy

More than 1,000 lawmakers and regional representatives started voting on Monday to chose the successor of the outgoing President Sergio Mattarella.  The selection of Italy’s next president could mark the return of political risk.  Mario Draghi’s government has brought some calmness to the country.  He was brought in to lead a broad coalition government in February last year, but does not have the support of any Italian political party.  Some, such as Silvio Berlusconi and League boss Matteo Salvini wish that he remains Prime Minister to combat the health crisis and rising energy prices.  Internal bickering could slow the number of reforms that Italy has to ratify to get around 200 billion euros of EU post pandemic funds.  There could be early elections that could lead to instability as Italy’s economy faces public debt worth around 150% of economic output.  There are signs of concerns amongst investors as the difference in the yields on Italian and German 10-year bonds which has remained stable at around 100 bp for most of the past year has recently widened to about 140 bp.  It is however, still far from the 300 bp spread reached under the anti-austerity coalition government in 2018.

Market Wrap

Shares worldwide dropped on Monday on the prospect of a Russian attack on Ukraine that withdrew the demand for riskier assets, bolstering the dollar, raising oil and bruising bitcoin.  US President Joe Biden was considering options to boost US military assets in the region as Russian troops were added. The Euro Stoxx 600 fell 1.3% to its lowest since 20 December, with the FTSE 100 index dropping by 2.63% closing at 7,297.15, in Paris the CAC 40 closed lower by 3.973% to 6,787.79. The DAX also closed lower by 3.799% to reach 15,011.13.  Fears about the Federal Reserve’s aggressive monetary policy tightening moves and the possibility of military conflict in Ukraine fuelled a wild session on Wall Street on Monday. Meanwhile, Eurozone government bond yields dropped on Monday on worries about a Russian attack on Ukraine that boosted the demand for safe-haven assets ahead of the FED’s meeting later in the week.  Germany’s 10-year government bond yield fell 2 basis points to -0.81%. Monday saw the Dow Jones Industrial Average increased by 0.29% to close at 34,364.5, the NASDAQ 100 closed higher by 0.49% to reach 14,509.58 and also the S&P 500 closed lower by 0.28% at 4,410.13. 

On Tuesday, European shares recovered from their worst drop since June 2020, catching up with a late recovery on Wall Street on Monday, while upbeat earnings from companies such as Ericsson and Logitech provided some relief.  The CAC 40 closed higher by 0.739% to reach 6,837.96 and the DAX reached 15,123.87 rising by 0.751%.  The FTSE 100 also closed higher by 1.02% reaching 7,371.46.  

Bond yields in the euro zone climbed on Tuesday, as stock markets recovered and oil prices rose, putting national debt markets on the back foot. In the US, the Dow Jones closed lower by 0.19% to 34,297.73, the NASDAQ 100 closed lower by 2.48% to 14,149.12 and the S&P 500 closed lower by 1.22% to reach 4,356.45.

Meanwhile on Wednesday US Stock index futures rallied ahead of the outcome of the FED meeting, with increases in interest rates already priced in.  US S&P futures (Esc1) jumped 1.34% indicating a stronger open on Wall Street.  NASDAQ futures rose 2% after Microsoft Corp jumped in pre-market trading, as the company’s forecast revenue for the current quarter is ahead of Wall Street targets.   The indices in the US enjoyed a brief surge after the Federal Open Markets Committee left key interest rates near zero however, took an abrupt nosedive after the US Federal Reserve released a statement at the end of its two-day policy meeting where in its statement the FED warned it would soon start raising the FED funds target rate to address persistent inflation caused by the supply chain problems.  The Dow Jones Industrial Average dropped by 0.38% to close at 34,168.09, the NASDAQ 100 closed higher by 0.17% to reach 14,172.76 and the S&P 500 closed lower at 4,349.93 by 0.15%.  Meanwhile, European stocks closed higher with the CAC 40 climbing 2.106% to reach 6,981.96, the DAX reached 15,459.39 to close at 2.218% and the FTSE 100 also closed higher by 1.33% to close at 7,469.78. 

On Thursday, US markets fell with the Dow Jones Industrial Average dropping by 0.02% to 34,160.78, the NASDAQ 100 closed lower by 1.2% to reach 14,003.11 and the S&P 500 closed lower by 0.54% to 4,326.51. Meanwhile in European, the CAC 40 increased by 0.599% to close at 7,023.80, the DAX closed higher by 0.42% to close at 15,524.27 and the FTSE 100 also closed higher by 1.13% to 7,554.31. 

Currency Roundup

Dollar

The dollar firmed slightly on Monday as traders were nervous about the tensions in Ukraine and the wait for the FED Reserve’s meeting later in the week. While investors bought safe-haven currencies amid tensions between Russia and the West over Ukraine and awaited the outcome of the Federal Reserve’s policy meeting, the dollar pushed higher on Tuesday, coming within striking distance of its two-week high. The dollar index was 0.1% higher at 96.02, just off its two-week high of 96.135 hit on Monday. On Wednesday, the US Dollar stood below its 2 1/2 week as risk sentiment stabilised before the FED meeting. The dollar briefly touched a level reached on 7 January of 96.3 against a basket of currencies before ending below that level. Thursday saw the dollar rising to multi-week highs against other major currencies after the FED’s chair Jerome Powell surprised investors by leaving the door open to larger and faster than expected interest rate hikes.  The dollar hit a two-month high of $1.1220 per euro and held gains at 114.62 yen.  It hit its highest in more than a year on the New Zealand Dollar, a seven-week peak on the Aussie and its best since January versus the pound. 

Euro

The euro lost 0.19% to 1.1319.  Tensions in Ukraine have been increasing for months after the Kremlin gathered troops near its borders, which the West says is preparing for a war to prevent Ukraine from joining NATO.  Meanwhile on Sunday, the US State Department announced it was ordering diplomats’ family members to leave Ukraine.  Wednesday saw the Euro dropping 0.1% to $1.1286 after reaching $1.12640 overnight for the first time since 21December. Meanwhile, against the Swiss Franc, the Euro stabilised at 1.0385 francs per euro.  On Thursday the Euro dropped by 0.75% to $1.1156 to its lowest since June 2020.

Sterling

The British pound fell to its lowest level in three weeks against the US dollar on Monday, as investors sold riskier assets amid Fed tightening expectations, rising tensions with Russia, and falling stock markets. Riskier currencies such as the British pound and the Australian dollar declined. In January, British business activity grew less than expected, with the Purchasing Managers Index (PMI) falling to an 11-month low, but cost pressures remained high. The pound hit a three-week low of $1.34435 at 1649 GMT, and by 1705 GMT it was at $1.3447, down 0.8% on the day. Against the euro, it edged down around 0.5%, at 84.13 pence. Sterling which has dropped sharply in the past two weeks amid panic in the stock markets over the possibility of tighter interest rates held at $1.35 on Wednesday. Against the euro, the pound was up 0.1% at 83.62 pence. So far in 2022, Sterling has traded strongly against the euro amid investor’s expectations as to whether the ECB will lag against its peers in raising rates.

Other currencies

The safe-haven yen and the US dollar rose on Tuesday, while the risk-sensitive New Zealand dollar fell alongside the euro, as concerns about a potential military conflict in Ukraine and a faster pace of Federal Reserve policy tightening grew. Later in the day investors looked for clues from the FED’s meeting about the timing and pace of rate hikes, as well as how quickly the central bank will reduce its more than $8 trillion holdings of Treasuries and mortgage debt.

Cryptocurrency Markets

Bitcoin on Monday dropped almost 9% to its lowest in six months on fears of a Russian attack on Ukraine that saw riskier assets worldwide selling.  It was down 8.8% at $33,058 to its lowest since July 23.  The World’s largest cryptocurrency has nearly halved in value since its record reached in November at $69,000.  According to traders as institutional investors invest more in cryptocurrencies, the moves are more linked to those of other risky assets such as stocks.  The sell-off has hit most digital assets and ether, which is the second largest cryptocurrency was at $2,202 having hit its lowest since July on Saturday.  Binance Coin, the fourth biggest token was down 12%. 

Oil

Oil prices increased on Monday amid worries about supply disruptions arising from the Russia-Ukraine situation and rising tensions in the Middle East which could even tighten the market.  Brent crude rose 0.4% to $88.20 a barrel whilst US West Texas Intermediate crude gained 0.3% to $85.35.  Energy markets are likely to be impacted by the tensions.  Europe is dependent on Russia for about 35% of its natural gas.  Oil prices are higher by more than 10% this year due to concerns about tightening supplies.  Furthermore, the oil market is tight as OPEC+ is struggling to hit its target from monthly increases of 400,000 barrels per day. Oil prices rose over 2% on Tuesday amid concerns that supplies could become tight due to Ukraine-Russia tensions, threats to infrastructure in the United Arab Emirates and struggles by OPEC+ to hit its targeted monthly output rises.  Oil prices rose despite the drop in equities markets and the possibility of an interest rate hike by the US Federal Reserve on Wednesday.  Brent futures rose 2.2% to settle at $88.20 a barrel, while US West Texas Intermediate (WTI) crude rose 2.8% to settle at $85.60.  The US is in talks with major energy producing countries and companies around the world over a potential diversion of supplies.  Oil prices rose on Wednesday touching $90 a barrel for the first time in seven years on tight supply and rising political tensions between Russia and Ukraine that added to concerns about further disruptions.  Brent crude gained 2% to settle at $89.96 a barrel after surpassing $90 for the first time since October, 2014.  US West Texas Intermediate crude closed higher by 2% to $87.35 a barrel. 

Gold

Gold prices remained stable on Tuesday, as concerns about the Federal Reserve’s faster pace of policy tightening, offset the safe-haven’s demand fuelled by escalating tensions over Ukraine. Spot gold little changed at $1,840.49 per ounce.   U.S. gold futures were also steady at $1,841.50. Gold is widely regarded as an inflationary hedge, but it is extremely sensitive to rising US interest rates, which raises the opportunity cost of holding non-interest bearing bullion. On Wednesday, Gold prices were stable as investors kept back from betting ahead of the FED’s decision regarding policy tightening by the US central bank. Spot gold traded at $1,845.70 per ounce, after hitting its highest level since Nov. 19 on Tuesday. U.S. gold futures (GCv1) were down 0.3% at $1,847.10.

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

A press release dated 20 January, 2022 shows that in December, 2021 the annual rate of inflation as measured by the HICP was 2.6% up from 2.4% in November, 2021.  The largest upward impact on annual inflation was measured in the Food and non-alcoholic beverages Index (+0.9%) while the largest downward impact was recorded in the Communication Index (-0.07%).

Malta: Unemployment Rate – December 2021

A press release dated 26 January, 2022 the seasonally adjusted monthly unemployment rate for  December, 2021 stood at 3.4 per cent,  in line with the previous month. The unemployment rate for males was 3.7% while the rate for females stood at 3%. 

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