USA
• The Consumer Price Index rose a consensus-matching 0.8% MoM in February after climbing 0.6% the prior month. The energy component advanced 3.5%, with strong gains for fuel oil (+7.7%), gasoline (+6.6%), and utility gas services (+1.5%). The cost of food, meanwhile, sprang 1.0%. The core CPI, which excludes food and energy, met consensus expectations as well, rising 0.5% on a monthly basis. Prices for ex-energy services progressed 0.5% on gains for shelter (+0.5%) and transportation (+1. 4%). The latter category was boosted by a 5.2% jump in airline fares after suffering an omicron-related pullback the prior month. The price of core goods meanwhile, rose 0.4% MoM, as a small decline for used cars and trucks (-0.2%) was more than offset by increases for apparel (+0.7%), alcoholic beverages (+0.8%), and tobacco and smoking products (+0.6%). Year on year, headline inflation clocked in at 7.9%, up from 7.5% the prior month and its highest level since January 1982. This was 3.9 standard deviations above its 10-year mean and marked one the sharpest upturns in 100 years
• The inflation report came in roughly in line with what were pretty strong expectations. The headline print benefited yet again from a steep rise in gasoline prices. However, there was a lot more to the inflation story in February than just rising energy costs. Indeed, inflationary pressures appeared quite diffuse in the month. The cost of food continued to surge, apparel registered another big monthly gain, and alcohol and tobacco products advanced at an impressive clip. The price of used vehicles eased but remained 41.2% above it level a year ago. The cost of rent jumped 0.6% MoM (its steepest monthly gain since 1987) and was now up 5.5% on a six-month annualized basis, the most since 1986
• The trade deficit widened from $82.0 billion to an all-time high of $89.7 billion. The increase was due in part to a 1.8% jump in goods imports to a record $264.8 billion. The leading goods in this regard were crude oil (+0.9 billion), pharmaceutical preparations (+$0.9 billion), passenger cars (+$0.8 billion), natural gas (+$0.6 billion), and copper (+$0.6 billion). Goods exports instead, shrank 1.5% to $155.9 billion, which essentially reflected a drop in shipments of pharmaceutical preparations (-$3.2 billion). With imports expanding and exports contracting, the goods trade deficit swelled to an unprecedented $108.9 billion. On a country-by-country basis, the U.S. goods deficit widened with Canada (from $4.2 billion to $6.8 billion), the European Union (from $16.3 billion to $18.0 billion), Japan (from $5.0 billion to $7.1 billion), and Mexico (from $11.0 billion to $12.4 billion)
• The NFIB Small Business Optimism Index slid from 97.1 in January to 95.7 in February, its lowest mark since January of last year. Moreover, the net percentage of firms that expected the economic situation to get better sank a little further into in negative territory, dipping from -33% to -35% as geopolitical risks ramped up. Net sales expectations deteriorated further, sliding from -3% to -6%. Though hiring prospects moderated, 48% of firms still reported not being able to fill one or more vacant positions. Fully 22% of firms also identified poor quality of labour as their top problem, far above this indicator’s historical average of 12.7%. The proportion of firms that reported raising employee compensation in the past 3-6 months decreased to 45% from an all-time high of 50%. However, 26% of firms planned to raise compensation in the coming months
• The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be filled declined a tad in January from 11,448K to 11,263K. The ratio of job offers to unemployed person fell from an all-time high of 1.81 to 1.73. The report also showed that hires edged up from 6,450K to 6,457K, a level 7.2% above their pre-pandemic peak. Total separations, for their part, rose slightly from 6,042K to 6,058K as quits decreased from 4,403K, to 4,252K. All in all, the quit rate, that is, the number of voluntary separations as a percentage of total employment, dipped from a high 2.8% to a still-high 2.7%. The large number of quits is encouraging in that it might reflect growing confidence among employees and stiffer competition among employers
• The preliminary print of the University of Michigan Consumer Sentiment index fell from 62.8 in February to 59.7 in March, its lowest level since September 2011. This drop in the index is explained in part by the increase in consumers’ fears of rising prices, their 12-month inflation expectations reached an all-time high of 5.4% and long-term inflation is sitting at 3.0%
• With hotter inflation and higher interest rates on the horizon, real consumer spending is set to moderate this year. Recent data from the Federal Reserve Board show that the household debt-to-income ratio was 100.8% in Q4-2021, which is manageable relative to the past cycle. Furthermore, the household savings rate, which dropped to 6.4% in January, down from a pandemic peak of 33.8% in April 2020, has scope to recede further in the coming months to help support spending amid higher prices and slowing real income growth
• The pinch on consumer’s wallets could lead to slightly weaker discretionary spending over the near-term, but this is unlikely to dissuade Fed officials from raising rates at next week’s meeting. Inflationary pressures are running too hot, and the labor market has become as tight as it has ever been. Failing to move on rates runs the risk of the Fed falling even further behind the curve, which would erode its credibility and jeopardize the economic recovery. The FOMC is expected to acknowledge the recent tightening in financial market conditions, but to maintain its hawkish tone, setting the stage for what will be a series of rate hikes over the remainder of the year
• In terms of data release, retail sales print is out on Wednesday. Retail sales handily beat expectations at the start of the year, with retailers seeing their best month of sales in January since stimulus payments went out in March of last year. The same likely won’t be said for February. While the BEA only reports sales in nominal dollars, after adjusting for higher consumer prices during the month, this suggests real spending at retailers was negative. Consumer prices rose 0.8% last month, according to the consumer price index, with goods prices up 1.3%. Admittedly, higher food and energy provided much of the lift to goods prices, with core goods prices up “only” 0.4%. Still, higher prices for food and gas means fewer dollars left to be spent at other retailers
• Industrial production is out on Thursday. Producers continue to have trouble finding the adequate amount of labor and material needed to produce product and meet demand. This is clear from the February ISM report on manufacturing, high-frequency data on supply chains and anecdotal comments from business owners and clients. Bottlenecks have improved somewhat as goods demand has cooled and suppliers have been able to catch their breath, but Russia’s invasion of Ukraine threatens to throw a new wrench in the works of that progress
UK
• Britain’s London Stock Exchange Group said on Friday it is suspending all products and services for all customers in Russia, days after suspending the distribution of news and commentary in the country following new laws in Moscow. “LSEG confirms it is suspending all products and services for all customers in Russia, subject to any regulatory requirements,” the company said in a statement. “We continue to support our employees in the region. We are also engaging with our customers outside Russia who depend on us for data and pricing information inside Russia. We are evaluating alternative options to continue providing these services.”
• Britain’s FTSE 100 ended higher on Friday and marked its biggest weekly gain in three months with financial stocks and industrial miners leading gains, while data showing an improving UK economy bolstered the case for a Bank of England rate hike next week. The blue-chip FTSE 100 index gained 0.8% and ended the week 2.3% higher, with support from gains in energy stocks (.FTNMX601010), travel shares (.FTNMX405010) and banks (.FTNMX301010). It had declined for the previous three weeks. Data showed that gross domestic product (GDP) grew by 0.8% in month-on-month terms in January after a 0.2% decline in December. That was the strongest monthly expansion since June and more than forecast by any economist in a Reuters poll, which had pointed to growth of 0.2%
• The Bank of England looks set to lift interest rates to 0.75% on Thursday, its third rate rise in a row as it seeks to tame a dramatic surge in inflation that has been intensified by Russia’s invasion of Ukraine. A quarter-point rate hike on March 17 would return the cost of borrowing to where it was before Britain was hit by COVID-19 two years ago, but is unlikely to be the BoE’s last. The BoE was the first major central bank to push up rates since the start of the pandemic with an increase to 0.25% in December. Alongside February’s rise to 0.5% it also began to slowly reverse its 895 billion pounds ($1.17 trillion) of bond purchases. Higher rates will not stop the short-term rise in inflation, and the surge in energy prices will squeeze British living standards, ultimately pulling down inflation. But the BoE views raising rates now as necessary to reduce the risk that high inflation gets baked into longer-term expectations — a costly problem the last time inflation got this high in Britain in the early 1990s. “I think it’s really tough for the Bank at the moment to get this right,” said James Smith, a former BoE economist who is now research director at the Resolution Foundation think tank
EU
• The ECB announces it will wind down asset purchases early as inflation rises. Given the jump in market uncertainty after Russia began its invasion, investors were surprised on Thursday by the European Central Bank’s move to end its asset purchase program earlier than expected. The ECB’s Governing Council announced that it will taper its bond purchases more rapidly beginning next month, buying €40 billion in April, €30 billion in May and €20 billion in June and potentially ending the program entirely during Q3, opening the door for a rate hike before the end of the year. The council said that the pace of any rate hikes would be gradual and highlighted its willingness in light of the situation in Ukraine, to ensure smooth liquidity conditions and safeguard financial stability
• In a discussion of the German coalition’s budget plans, German Finance Minister Christian Lindner told ARD, the public broadcaster, that EUR 200 billion would be set aside for spending on climate protection, hydrogen technology, expansion of the electric vehicle charging network, and industrial modernization
• Shares in Europe rebounded in a volatile week of trading, perhaps reflecting hopes that a diplomatic solution to the Russia-Ukraine conflict might emerge. In local currency terms, the pan-European STOXX Europe 600 Index ended 2.23% higher. Germany’s DAX Index advanced 4.07%, while Italy’s FTSE MIB Index, which dropped briefly into bear market territory earlier in the week, tacked on 2.57%. France’s CAC 40 Index climbed 3.28%
CHINA
• China’s producer price index rose 8.8% in February from a year earlier, slightly above forecasts, while the consumer price index held steady at 0.9%, matching expectations. Consumer price growth is expected to continue to rise given the sudden increase in prices for oil and other commodities. Exports rose 16.3% in January and February from a year ago, while imports increased 15.5%. The pace of growth for both exports and imports slowed from December amid the rise in geopolitical uncertainty after Russia’s invasion of Ukraine
• On Thursday, five Chinese technology companies were cited by the US Securities and Exchange Commission for failing to meet audit requirements, leading to a sharp fall in many US-listed Chinese stocks. Under the Holding Foreign Companies Accountability Act, the SEC can delist firms listed on US exchanges in the US that fail to allow US authorities to inspect their financial audits for three straight years. Up to 270 Chinese firms face eventual delisting unless US and Chinese authorities reach agreement on allowing audits to be inspected
• The dispute over auditing has placed U.S.-listed shares worth hundreds of billions of dollars at stake. Yum China Holdings, owner of the KFC, Taco Bell, and Pizza Hut chains in China, said it may have to delist from the New York Stock Exchange by 2024 after the SEC’s notice, which sets a three-year deadline for Chinese companies to comply
• At the weeklong annual gathering of the National People’s Congress, the Communist Party-controlled parliament, Beijing set a goal for gross domestic product to expand “about 5.5%.” Many analysts regarded it as an ambitious goal and raised their expectations that Beijing would dial back tough structural reforms and step-up stimulus. Unlike previous years, the government did not set a target for “energy intensity,” leading some analysts to conclude that policymakers were more concerned about supporting growth over curbing pollution
• Chinese markets recorded a weekly loss amid a resurgence in COVID-19 outbreaks and the war in Ukraine, which pressured prices for industrial metals and agricultural commodities. The broad, capitalization-weighted Shanghai Composite Index slumped 3.98%, and the blue-chip CSI 300 Index retreated 4.21%
• Sources: T. Rowe Price, MFS Investment Management, Handelsbank Capital Markets, TD Economics. Wells Fargo, Reuters, M. Cassar Derjavets
