“US Retail Sales…”

US retail sales increased strongly in April as consumers purchased more motor vehicles amid an improvement in supply and increased spending at restaurants, that helped to boost the economy at the beginning of the second quarter.  The increase in retail sales which was reported by the Commerce Department on Tuesday suggested that demand was holding strong despite high inflation and increasing interest rates.  However, higher spending means that the FED will need to continue with its plan to cool demand.

Gas prices and their impact on US industrial Sector

Increased natural gas prices have raised manufacturing and transportations costs across many US industries, and the situation is expected to persist as the US exports more gas to Europe to cover for the loss of Russian supplies.  US natural gas futures have doubled this year, far more than the increases in retail gasoline and diesel.  Gas output in key localities in the US have slowed this year due to insufficient pipeline capacity.  Bad weather has also cut production and raised demand.  US liquefied natural gas (LNG) plants consumed 15% of domestic production in mid-March.  The highly increased demand from Europe which is trying to move away from Russian imports increased the expectation of higher prices among analysts. 

FED Powell promises to raise rates

Federal Reserve Chair Jerome Powell on Tuesday promised to raise interest rates as high as is necessary to combat rising inflation that according to him threatened the foundation of the economy.  At a Wall Street Journal event Powell said, “What we need to see is inflation coming down in a clear and convincing way and we’re going to keep pushing until we see that…If we don’t see that, we will have to consider moving more aggressively.”  Whilst acknowledging the possible pain emanating from constraining inflation it could cause slower economic growth or higher unemployment.  He said that there were “pathways” for the pace of price hikes, to ease without causing a full-blown recession.  However, should inflation not drop, Powell said the FED would not stay away from raising rates until it does.  He said, “If that involves moving past broadly understood levels of ‘neutral’ we won’t hesitate to do that,” Powell said. 

The EU’s plan to end reliance on Russian Fossil Fuels

On Wednesday the European Commission revealed a EUR 210 billion plan for Europe to end its reliance on Russian fossil fuels by 2027.  The war between Russia and Ukraine, induced the EU to rethink its energy policies as Russia supplies 40% of the bloc’s gas and 27% of its imported oil.  Meanwhile, EU countries are struggling to agree on the sanctions.  The plan proposed by Brussels includes a switch to import more non-Russian gas, more use of renewable energy and more effort to save energy.  The measures include a mix of EU laws, non-binding schemes, and recommendations to governments of the EU member countries who are responsible for their national energy policies. In the aggregate Brussels expects that EU member states will require 210 billion euros in extra investments by 2027 and 300 billion euros by 2030 in addition to those already needed to meet the 2030 climate target.  As stated by Commission president Ursula von der Leyen whilst referring to the package, “Repower EU will help us to save more energy, to accelerate the phasing out of fossil fuels and, most importantly, to kickstart investments on a new scale.” The commission also stated that infrastructure would be required: EUR 10 billion for a dozen gas and liquefied natural gas projects, and up to EUR 2 billion for oil, targeting land-locked Central and Eastern European countries that lack access to non-Russian supply.  Brussels wants countries to finance the measures using the EU’s COVID-19 recovery fund, that contains more than 200 billion euros of unspent loans. 

UK Inflation

Inflation in the UK surged in April to its highest annual rate since 1982.  Consumer price inflation hit 9% in April, said the Office for National Statistics on Wednesday rising higher than the levels reached during the 1990s recession at which Britons experienced rocket high interest rates and widespread mortgage defaults.  Out of Europe’s large economies, Britain has the highest inflation rate.  Factors contributing to such increase were soaring energy bills.  Finance Minister Rishi Sunak stated that “We cannot protect people completely from these global challenges but are providing significant support where we can and stand ready to take further action.”  Households are facing the largest impact on cost of living since records started in the 1950s.  According to the ONS, food prices climbed by nearly 7% in the 12 months to April.  Whilst the government has £22 billion support for households so far, much of this is cancelled out by recent tax increases on workers.  The increase in prices charged by restaurants and cafes, as value-added tax rates reverted-back to pre-pandemic levels in April, adding to the inflation jump last month. 

EU Ministers fail on persuading Hungary to sign up to Russian oil embargo

On Monday, ministers failed to reach an agreement to lift its veto of a proposed oil embargo on Russia. Their efforts to put pressure on Hungary were unsuccessful. As Lithuania stated, the bloc is being “held hostage by one member state.”  Meanwhile, Germany which is a major buyer of Russian energy, said it wanted a deal to authorise the oil embargo, which it suggested could last for years.  Joseph Borrell, the EU foreign policy chief, said, “unhappily, it has not been possible to reach an agreement today.” He stated that Hungary based its reasoning on economic rather than political concerns.  According to Borell, foreign ministers had decided to provide an additional EUR 500 million for arms purchases to support Kyiv.  This takes the amount of money earmarked by the EU for that purpose to EUR 2 billion.  Meanwhile, Hungary, said it wants hundreds of millions of euros from the bloc to mitigate the cost to give up Russian crude.  For the EU to move ahead with the embargo, it needs all 27 states to be in agreement.

China’s economy

China’s retail and factory activity dropped sharply in April amid the COVID-19 lockdowns that disrupted supply chains and confined people in their homes, hitting production and consumption.  Retail sales in April contracted by 11.1% from a year earlier.  This is the largest contraction since March 2020, data from the National Bureau of Statistics showed on Monday.  Factory production dropped 2.9% from a year earlier, representing the largest decline since February 2020 due to supply chain and distribution issues.  China has also processed 11% less crude oil in April, with the daily throughput the lowest since March 2020.  In the same month, power generation dropped 4.3%, the lowest since May 2020.  According to Fu Linghui who is a spokesperson at the China’s statistics bureau, “In April, the epidemic had a relatively big impact on the economic operation, but this impact was short-term and external.”  He further added that he is expecting the economy to improve in May as the COVID-19 is under control in places such as Shanghai and other places.  Meanwhile, investment in fixed assets rose 6.8% in the first four months, compared to the 7% expected increase.  Such investment is beneficial for Beijing to boost the economy after a decline in exports. 

China’s Central Bank

As was expected, China’s central bank, kept interest rates unchanged for a four straight month, and rolled over maturing medium-term policy loans.  The bank said that it was keeping the rate on Yuan 100 billion worth of one-year medium term lending facility loans (MLF) to some financial institutions unchanged at 2.85%.  There are still the expectations for more stimuli to address a slowing economy.  The PBOC said in an online statement that, Monday’s liquidity move was designed to “keep banking system liquidity reasonably ample.”  China’s yuan has lost more than 6% against the dollar in the past four weeks, the sharpest drop in decades.  The persistent strength of the dollar and the surging US yields have continued to put pressure on the Chinese currency. 

ECB’s Villeroy on a weak Euro

A weak euro could threaten the ECB’s efforts to steer inflation towards its target, said ECB policymaker Francois Villeroy de Galhau on Monday.  On Thursday, the euro hit its lowest against the dollar since 2017.  A weaker euro makes imported goods such as goods and commodities that are denominated in US dollar more expensive.  At a conference at the Bank of France Villeroy stated, “Let me stress this: we will carefully monitor developments in the effective exchange rate, as a significant driver of imported inflation…A Euro that is too weak would go against our price stability objective.” He further added that a decisive ECB governing monetary policy could be expected in June followed by an “active summer” and policymakers should “at least move towards the neutral rate”, at which the central bank’s monetary stance is neither stimulating the economy nor holding it back. In addition, he said that the drop in cryptocurrencies should be a wake-up call for global regulators: “Crypto assets could disrupt the international financial system if they are not regulated, overseen and inter-operable in a consistent manner across jurisdictions.”

Oil    

Oil prices climbed on Monday over optimism that China would experience demand recovery after indications that the coronavirus pandemic is easing.  Brent crude futures for July delivery increased by 2.4% to close at $114.24 a barrel while US West Texas Intermediate crude climbed 3.4 to $114.20 a barrel.  Tuesday saw oil hitting its highest in seven weeks on the EU’s push to ban Russian oil imports that could tighten supply.  Brent crude reached as high as $115.69 its highest since 28 March while US West Texas Intermediate crude gained 1% to $115.37.  Oil also gained on hopes of demand recovery in China as it looks to ease COVID restrictions according to analysts and further support coming from figures showing OPEC and allied nations, including Russia, that in April produced far lower levels than required under a deal to gradually ease the record cuts made during the worst of the pandemic in 2020.  Wednesday saw oil prices dropping by 2.5% reversing early gains as traders’ concerns about a supply crunch eased as government data showed US refiners increased output and crude futures followed the drop on Wall Street.  Brent crude futures for July dropped lower by 2.5% at $109.11 a barrel while US West Texas Intermediate crude for June dropped 2.5% to $109.59 a barrel.  US crude inventories dropped by 3.4 million barrels last week, showed government data.  Oil prices rebounded from two days of losses impacted by weaker dollar and expectations that China could ease some lockdown restrictions that could boost demand.  Both Brent and US crude rose by nearly $5 a barrel in a few hours recovering from the losses in the week. 

Gold

Gold prices increased slightly on Monday as US Treasury yields pulled slightly back offsetting a relatively firm dollar, which along with interest rate hikes, pushed the gold to a more than three-and-a-half month low.  Spot gold climbed 0.3% to $1,817.12 per ounce after earlier hitting its lowest since 31 January at $1,786.60.  On Tuesday gold dropped amid robust US retail sales data and expectations of aggressive interest rate hikes however, a pullback in the dollar limited losses.  Spot gold dropped 0.5% to $1,815.19 while US gold futures settled higher by 0.3% at $1,818.9.  Gold prices dropped lower on Thursday as a higher dollar and rising Treasury yields weighed on the bullion.  Spot gold had eased by 0.2% to $1,811.56 per ounce and US gold futures dropped 0.4% to $1,809.50.  Bullion seemed to track the daily moves in the dollar and the benchmark US 10-year Treasury yields in recent weeks, with the 20-year highs in the dollar pushing gold prices to their lowest in nearly over three months.  A strong dollar makes gold less attractive for buyers holding other currencies.  Gold has also been susceptible to the possibility of aggressive monetary policy.  Higher US short-term interest rates and bond yields raised the opportunity cost of holding gold.        

Malta:  Harmonised Index of consumer prices (HICP) – April 2022

A press release dated 18 May 2022 shows that in April 2022 the annual rate of inflation as measured by the HICP was 5.4% higher from the 4.5% in March 2022.  The highest annual inflation was measured in the Food and non-alcoholic beverages index (+1.56%) while the downward impact was recorded in the Communication index (-0.07%).  The HICP measures the monthly price changes in the cost of purchasing a representative basket of consumer goods and services. 

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