“US Inflation…”

US consumer prices climbed solidly in December with the annual increase in inflation, being the largest in nearly four decades. The consumer price index increased 0.5% last month after an 0.8% increase in November, said the Labour Department on Wednesday.  In the 12 months through December the CPI surged 7%.  That was the biggest year-on-year increase since June 1982 and followed a 6.8% rise in November.  High inflation is impacting the economy, amid the supply chain issues raised by COVID.  Inflation is way above the FED’s 2% target rate and is also being lifted by wage pressures.  On Friday 7^th January, the government reported that the unemployment rate dropped to a 22 month low of 3.9% in December, indicating that the labour market is at or near maximum employment.  Excluding the volatile food and energy components, the CPI increased 0.6% last month after rising 0.5% in November.  In the 12 months through December the so-called core CPI accelerated 5.5%.  This was the largest year on year gain since February 1991 and followed a 4.9% advance in November.  The driving forces behind the rising inflation are increases in the price of services such as rentals, and scarce goods like motor vehicles.  The year-on-year core CPI rate is seen peaking in February. 

Market Wrap

The major equity markets made some cautious gains on Monday as investors awaited another US inflation reading that could lead to an early rate hike from the Federal Reserve, lifting bond yields even further.  The coronavirus cases globally threatened to cripple consumer spending and growth as the FED is considering easing of the liquidity.  This is tough timing for markets that are used to endless cheap money.  The S&P 500 futures added 0.1% and NASDAQ futures rose by 0.2%.  The EUROSTOXX 50 futures and the FTSE futures both climbed up 0.2%.  Main indexes on Wall Street tumbled on Monday as heavyweight technology stocks dropped on expectation of a higher rate environment, which pushed US Treasury yields to new two year highs.  Companies such as Apple, Amazon.com Inc, Microsoft Corp., and Tesla dropped between 2.1% and 4.4% in early trading.  The S&P 500 consumer discretionary, technology and communication sectors capturing the major growth companies, dropped the most among the 11 major S&P sectors.   The S&P 500 dropped by 0.14% to 4,670.29, the NASDAQ 100 increased by 0.14% to close at 15,614.43 and the Dow Jones Industrial Average closed lower by 0.45% to reach 36,068.87.  European markets dropped with the CAC 40 closing lower by 1.437% to reach 7,115.77, the DAX closed lower by 1.125% to close 15,768.27 and the FTSE 100 dropped by 0.53% to close at 7,445.25.  Meanwhile, the benchmark 10-year Treasury yield hit 1.8% in early trading a level last seen in early 2020.  It shot up 25 basis points last week in its biggest move since late 2019. 

European shares ticked higher on Tuesday, as investors returned to tech stocks after a seven-day sell off driven by concerns about rising rates.  The pan European STOXX 600 advanced 0.9% after the late session on Wall Street supported Asian equities.  European tech stocks advanced 2.1% after dropping 3.6% to a near three-month low in the previous session.  Global stocks moved up and bond yields stuck to their recent highs on Tuesday as investors awaited the FED’s Chair Jerome Powell’s appearance before the Senate Banking Committee, hoping for indications of expected policy tightening.  Powell who is seeking a second four-year term as head of the FED, appeared before the committee on Tuesday followed by a hearing with vice chair Lael Brainard on Thursday.  The Euro STOXX index jumped 1% cutting a three-day losses to enjoy its best day in nearly three weeks.  Meanwhile, Eurozone government bond yields traded near recent peaks. 

On Wednesday Eurozone bond yields held near recent highs as investors awaited a US inflation reading that may give further indications about the FED’s policy tightening path ahead.  The testimony to US congress by US Federal Reserve Chairman Jerome Powell who said the economy was strong enough to handle the start of tighter monetary policy, sending the US Treasury yields dropped on Tuesday after the European markets close, perhaps as Powell did not sound more hawkish than market expectations.  The Dow Jones Industrial Average closed higher by 0.11% to reach 36,290.32, the NASDAQ 100 closed at 15,905.1, higher by 0.38% while the S&P 500 closed higher by 0.28% to close 4,726.35.  Meanwhile, in Europe, the CAC 40 closed higher by 0.749%, the DAX closed at 16,010.32 higher by 0.43% and the FTSE 100 closed higher by 0.81% to close at 7551.72.

Eurozone bond yields edged higher on Thursday as the relief that US inflation did not surge by more than expected declined and market focus turned back to the central bank’s tightening policy path.  Eurozone bond yields have climbed sharply in January mirroring US Treasury as investors bet the Federal Reserve could hike interest rates as early as March.  However, the borrowing costs in Europe and the US dropped on Wednesday as the inflation reading was not as high as some had feared.  Thursday saw the NASDAQ closing lower by 2.57% reaching 15,495.62 while the S&P 500 closed lower by 1.42% to reach 4,659.03, the Dow Jones Industrial Average was hit less reaching 36,113.62 dropping by 0.49%.  Meanwhile, the CAC 40 closed lower by 0.498% to reach 7,201.14, the DAX moved higher by 0.133% to close at 16,031.59 while the FTSE 100 moved higher by 0.16% closing at 7,563.85.

US Weekly Jobless Claims

The number of Americans filing new claims for unemployment benefits rose unexpectedly in the first week of January due to a resurgence in the number of COVID-19 infections.  Initial claims for state unemployment benefits increased by 23,000 to a seasonally adjusted 230,000 for the week ended 8 January, said the Labour Department.  Claims remain below their pre-pandemic level, an indication of strengthening labour market conditions and have dropped from a record high of 6.149 million in April 2020.  While jobless benefits remain very low despite an increase in COVID cases driven by Omicron Variant which has disrupted activity from airlines to schools, employers are holding on their workers with 10.6 million job openings at the end of November.

US Congressional Hearing

Federal Reserve Chair Jerome Powell in a congressional hearing that signalled his likely confirmation for a second term as head of the US Central bank, said on Tuesday that the economy should weather the current COVID-19 surge with only “short-lived” impacts and was ready to start tightening monetary policy.  Powell was openly endorsed by the Republicans and Democrats on the Senate Banking Committee in a session that focused mainly on how the FED planned to address inflation which is running at high levels, why the central bank misdiagnosed the surge in price increases, and what stricter monetary policy would mean for job growth.  The FED chief said the central bank was determined to ensure that high inflation did not become “entrenched” and that far from diminishing job growth, a turn to higher policy interest rates and a runoff of its asset holdings was necessary to keep the current economic expansion underway.  In his testimony, Powell said, “Inflation is running very far above target.  The economy no longer needed or wants the very accommodative policies we have had in place.”  With the FED’s benchmark overnight interest rate near zero and nearly $9 trillion in assets on its book, “it is a long road” to anything close to restrictive policy, Powell said.  In the meantime, FED actions “should not have negative effects on the employment market,” he added.  Powell also said, that despite the disruptions to travel, schooling and some core services, “what we are seeing is an economy that functions through these waves of COVID”.  No new indications were given by Powell over the timing for the raising of interest rates, which are expected to start in March.  He also stated that no decision had been made about when to let the size of the central bank’s asset holdings decline, however it was likely to happen “sooner and faster” than it did following the 2007-2009 recession, when the FED waited about two years after an initial rate increase to shrink its balance sheet.  The hearing was a first step in the expected confirmation of Powell to a new four-year term. 

Currency Markets

US Dollar

The dollar started the week with support as traders were betting on US inflation data and appearances from several FED Reserve Officials would raise the case for higher interest rates.  Federal Reserve Chair Jerome and governor Lael Brainard testified before Senate committees this week regarding their nominations as chair and deputy chair at the FED.  The dollar index was up 0.1% at 95.912.  The US-Russia talks over rising tension in Ukraine also placed traders on edge as the two sides seem far apart.   The US dollar traded near the middle of its recent range against major peers on Tuesday as traders looked to FED Chair Jerome Powell’s nomination hearing later in the day for new indications about the timing and pace of policy normalisation.   On Thursday the dollar lost ground against most rival currencies after inflation proved weaker than feared in December, leading investors to cut substantial long positions in the currency.

EUR

The euro stood at $1.1336 on Monday leaving it near the top of the recent $1.1184/1.1382 trading range.  Tuesday saw the euro hitting a seven-week high versus the Swiss franc after a rise in the Swiss National bank sight deposits last week a possible indication that the central bank is intervening to cap the franc’s strength. 

Sterling

Sterling was also marginally weaker on the dollar but has been climbing with bets that the Bank of England is likely to raise in line with the FED.  The currency traded near a two-month high and close to last week’s two-year peak on the euro. Sterling rose on Tuesday to touch to its highest level versus a weakening dollar in almost 10 weeks, supported by expectations that the Bank of England will raise interest rates further.  Sterling rose 0.26% versus the dollar to $1.3620, its highest since 4 November when it dropped by 1.5% on the day after the BOE surprised the market by keeping interest rates unchanged.  Against the euro, the pound edged 0.1% up at 83.36 pence, after touching its highest versus the single currency since Feb 2020.   Thursday saw the sterling hitting levels reached late October against a weakening dollar as investors expect a February rate hike from the BOE to back the pound and saw limited risks linked to Prime Minister Boris Johnson’s party scandal.  Against the Euro, sterling stood flat at 83.49 pence.  

Gold

Gold prices eased on Monday as traders awaited the December US inflation data that could lead to an earlier rise in interest rates by the FED.  Spot gold was down 0.2% to $1,792.40 per ounce after hitting its lowest level since 16 December of $1,782.10 on Friday.  US gold futures dropped 0.3% to $1,792.30.  Gold is considered a hedge against higher inflation, but the metal is highly sensitive to rising interest rates, which increase the opportunity cost of holding non-yielding bullion.   Gold prices rose on Tuesday as traders awaited inflation data for December and considered the possibility of faster interest rate hikes by the FED Reserve. Spot gold rose 0.4% to $1,809.22 per ounce while US gold futures were up 0.6% to $1,808.80.  The yield on the 10 year Treasury notes inched away from an almost two -year high of 1.808% to about 1.757%.  Goldman Sachs is expecting the US Federal Reserve to raise interest rates four times this year, matching the view of analysts such as JP Morgan and Deutsche Bank.  Gold prices were steady on Thursday near a one-week high as the US Dollar and Treasury yields retreated after inflation data in line with expectations reinforced the need for quicker interest rate hikes.  Spot gold was flat at $1,825.82 per ounce while US gold futures was also unchanged at $1,826.50.  In the previous session, bullion hit a one week high of $1,827.92 its highest since 5 January. 

Oil

Oil prices dropped on Monday as concerns about demand amid the rise in the Omicron coronavirus infections outstripped concerns about oil supply reduction from Kazakhstan. Meanwhile, Libyan production ticked up on Monday and concerns about rising Libyan output overtook the market.   Brent crude dropped 1.1% to settle at $80.87 a barrel while US West Texas Intermediate (WTI) crude was down 0.9% to $78.23.  Thursday saw oil prices edging lower as investors took profits after two days of gains amid fears of aggressive US interest rate hikes, however, there were expectations of a strong economic recovery that could boost demand in a tightly supplied market.  US West Texas Intermediate (WTI) crude futures settled down by 0.6% at $82.12 a barrel, after rising 5.6% over the last two days.  Brent crude futures dropped 0.2% to $84.47 a barrel whilst it gained 4.7% over Tuesday and Wednesday. 

Malta:  Unemployment Rate – November 2021

In a press release dated 10 January 2022 in November the monthly unemployment rate was 3.5%.  For the month under review, the unemployment rate for males was 3.9% while the rate for females stood at 3.1%.  The unemployment rate during the November 2021 for persons aged 15 to 24 years was 8.5% while the rate for those between 25 and 74 years stood at 3%. 

Malta: Index of Industrial Production – November 2021

A press release dated 11 January 2021, shows that after adjusting for seasonal effects and the working-day pattern, the index of industrial production decreased by 3.7% between October and November, 2021. Decreases in production were registered across three main industrial groupings mainly consumer goods (4%), capital goods (3.7%) and intermediate goods (3.2%). Production of energy increased by 2.3%.  Meanwhile, in November 2021, the total production generated by the Maltese manufacturing, energy and mining and quarrying industries dropped by 7.5% from November, 2020.  The largest decline was registered in the production of consumer goods (16.1%) followed by the production of intermediate goods (10.8% and capital goods (5.3%).  The production of energy rose by 29.1%. 

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