USA
• The U.S. Bureau of Labor Statistics surprised the market with 678k jobs created in February, well above 400k anticipated by forecasters. This was on top of an upward revision of 92k to December and January. The unemployment rate fell to 3.8 % – the lowest reading since the pandemic, just 0.3 %age points above the level two years ago. The labor force – a measure of people working or actively looking for work – also made progress. The labor force participation rate ticked up to 62.3% after 304k people joined labor force in February. All in all, labor market is getting tighter and tighter
• The leading business indicators diverged. As measured by the ISM Index, the manufacturing sector reversed three months of decline, accelerating to 58.6. Demand was solid, with new orders moving above 60 again. Production accelerated, but it could have been even stronger without materials supply constraints. The backlog of orders index jumped by almost 9 %age points (ppts), while supplier deliveries inched 0.5 ppts higher. Despite all these challenges, inventory rebuilding continued, albeit at a very slow pace adding only 0.4 %age points in February
• The services sector slowed in February, with the two demand indicators – business activity and new orders – declining to mid-50 levels, last seen exactly one year ago. The consensus anticipated a modest increase, expecting that the fading threat of Omicron would help the services sector bounce back. Respondents blamed the post-holiday fatigue and difficult business conditions, affected by capacity constraints, inflation, logistical challenges, and labor shortages. Indeed, supply-side indicators deteriorated as delivery times slowed again while the employment index moved back into the contractionary territory.
• The price sub-indexes remained elevated, although price pressures seem to track lower in the manufacturing sector, while services continue to struggle with a reading above 83. Despite these differences, there is little doubt that next week’s CPI reading will come in much higher than the 2% target. With the threat of higher prices becoming more entrenched, the Fed is unlikely to hesitate to raise the fed funds rate by 25 basis points on March 16th
• Powell signals that the Fed will hike rates a quarter-point. In testimony on Capitol Hill this week, US Federal Reserve Chair Jerome Powell indicated that he is inclined to propose and support a 0.25% increase in the federal funds target when the FOMC meets March 15 and 16. “The bottom line is that we will proceed, but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy,” Powell said, but added that if inflation stays hot, the Fed would be prepared to raise rates more than 0.25% per meeting. It is too soon to assess the impacts of Western sanctions on Russia on the US economy, the Fed chair said. North of the border, the Bank of Canada began its tightening cycle on Wednesday, raising its policy rate to 0.5% from 0.25%. Multiple additional hikes are expected
• Since the start of the invasion, the broad Goldman Sachs Commodity index is up about 16%, to a 14-year high. Oil futures breached $115 a barrel this week for the first time since 2008 as sanctions limited market access to Russian raw materials. Russia has been forced to offer steep discounts on its crude but is still having trouble finding buyers. To the extent that dollar-denominated export revenues become unusable or illiquid, Russia could see less of an incentive to sell energy to the West, analysts at Goldman Sachs said this week. Oil prices eased from their highs on Thursday amid reports that Western nations are close to a deal with Iran over its nuclear program. The recent widespread surge in commodity prices and disruption of existing supply chains is exacerbating already high global inflation. One outgrowth of the sanctions is fear that higher global natural gas prices will push up the costs of fertilizers, ultimately resulting in food price inflation and shortages
• Stocks ended lower over a volatile week, as investors continued to weigh developments in the crisis in Ukraine. The S&P 500 Index was dragged lower by the heavily weighted technology, financials, consumer discretionary, and communication services sectors, but all other segments moved higher. The energy sector performed best, as international oil prices traded as high as nearly USD 120 per barrel on Thursday before news of a possible Iran nuclear deal caused them to retreat a bit. The Cboe Volatility Index (VIX) reached its highest point in over a year
• On Wednesday, MSCI announced that it would remove Russian securities from its indices, and U.S. authorities weighed restrictions on Russian imports. On Thursday, President Joe Biden announced new penalties targeting Russian oligarchs with close ties to Russian President Vladimir Putin
UK
• Figures out highlight that lending to the housing market is showing signs of improvement: net borrowing of mortgage debt by individuals amounted to GBP 5.9bn in January (consensus: GBP 4.35bn) and mortgage approvals for house purchases rose to 74,000 in the same month (consensus 72,000), comfortably beating the 12-month pre-pandemic average up to February 2020 of 66,700. However, consumer credit figures show more muted activity levels. Consumers borrowed an additional GBP 0.6bn in consumer credit, on net, but this was considerably below expected levels (consensus: GBP 1.05bn) and lower than the average of GBP 1bn in the 12 months up to February 2020
• ONS statistics for Q3 2021 showed that the UK household savings rate had returned to normal, opening up the prospect of households deploying their accumulated savings into the economy and helping to drive economic growth in 2022. However, household deposits in January have risen at a higher rate than pre-pandemic, suggesting the savings rate may be creeping up again, and weaker-than-expected numbers for consumer credit in January imply households may have become more cautious on discretionary spending following the Christmas Omicron wave. This caution will likely be reinforced and reflected in future figures following geopolitical turbulence arising from Russia’s invasion of Ukraine. A large portion of household-accumulated savings during the pandemic are likely to be used on big-ticket items such as house purchases rather than in the wider economy. Growth in business investment – which remains around 8% below its pre-pandemic level – remains the most likely driver of economic recovery in 2022, assuming of course that a resolution to the Ukrainian crisis comes about in the short term
• The UK Treasury moved to deny Russian aviation and space industry companies access to British-based insurance or reinsurance services. The London Stock Exchange also suspended trading in 28 Russian companies and excluded all Russian businesses from stock market indexes.
EU
• Eurozone inflation in February rose to 5.8 % YoY, compared to 5.1 % in the previous month and was above expectations. Energy is expected to have the highest annual rate (31.7 % compared with 28.8), followed by food, alcohol & tobacco (4.1 compared with 3.5 %), non-energy industrial goods (3.0, compared with 2.1 %) and services (2.5 compared with 2.3 %). Meanwhile, core inflation rose to 2.7 % this month, compared to 2.3 % in the previous one, which was also above expectations. The releases in February (January) were as follows: France 4.1 % (3.3), Germany 5.5 % (5.1), Italy 6.2 % (5.1) and Spain 7.4 % (6.2)
• Energy inflation has risen to extreme levels in both Italy and Spain (46.4 and 32.2 percent respectively). One reason why these rates are higher than in France and Germany (21.8 and 22.4 percent respectively) has to do with longer lag between energy market prices and electricity and gas used for heating in the latter countries. This means more divergence is likely in inflation between France and Germany on the one hand, and Italy and Spain on the other. Meanwhile, the relative strength of core inflation in Germany (likely unchanged from last month) and other eurozone countries will fuel further concerns about underlying inflation pressures
• The ECB faces an unenviable policy dilemma ahead of its March 10th meeting. Increased inflation pressures will likely have reinforced concerns about high inflation and potential second-round effects on inflation expectations and wages. February HICP inflation was 5.8 percent and core inflation rose to 2.7 percent. That said, concerns over economic activity and the fiscal policy outlook could push the ECB to wait and see over normalising policy. Whereas the most recent PMI data for the eurozone showed strong resilience during the omicron wave, household consumption and business investment are expected to suffer, partly as a result of input costs but also due to rising uncertainty
• The inflationary pressures by themselves now suggest there is a significant chance that policy could tighten earlier. However, should economic activity suffer significantly, the ECB may have to worry about the costs of tightening into a possibly severe downturn. And in a downturn, possibly even a recession, demand could fall to the point where inflationary pressures recede. And moreover, expectations of wage growth might have to be revised down if firms are unable to offer workers pay increases corresponding to the ECB expectations
• EU Economics Commissioner Paolo Gentiloni said that Brussels would “reassess” in two months whether to reimpose its 2023 budget guidance, indicating that an opt-out from EU debt and deficit limits beyond this year might be extended. “Russia’s invasion of Ukraine will likely impact growth negatively, including through repercussions on financial markets, further energy price pressures, more persistent supply chain bottlenecks, and confidence effects that we should not under-evaluate,” Gentiloni said
• Shares in Europe fell sharply, as investors weighed the possible implications of Russia’s ongoing invasion of Ukraine. In local currency terms, the pan-European STOXX Europe 600 Index gave back about 7% of its value. Major indexes tumbled. Germany’s DAX Index and France’s CAC 40 Index dropped more than 10%, while Italy’s FTSE MIB Index lost more than 12%
CHINA
• Factory activity returned to expansion as the Caixin/Markit manufacturing Purchasing Managers’ Index (PMI) rose to 50.4 in February, up from January’s 49.1 reading, a two-year low. The 50-mark separates growth from contraction. Meanwhile, the Caixin/Markit services PMI fell to 50.2, its lowest level since August 2021, from 51.4 in January
• News from China’s property sector continued to reflect severe liquidity pressures on developers. Year-on-year sales volume in January to February for the top 100 developers slid 43.4%, worse than the 30.9% drop recorded in December, according to the China Real Estate Information Corporation a leading real estate data provider. Meanwhile, reports of credit rating downgrades and missed payments from cash-strapped developers continued, while a few companies forged ahead with restructuring plans. KWG Group, Shimao Group, and Redco Properties all had their credit ratings cut by Western credit agencies. Some domestic companies took advantage of the weak environment to buy back bonds in the open market
• China will reportedly announce an official 2022 gross domestic product (GDP) target of 5.0% to 5.5%, the first time since 1991 that the country’s economic growth target will be below 6%. Investors will also watch for signs of more economic stimulus in a politically sensitive year. The People’s Bank of China may cut interest rates in the near term to battle the economic slowdown, reported the state-run China Daily. However, most analysts expect a fairly uneventful parliamentary meeting given the importance of maintaining stability ahead of China’s twice-a-decade meeting of the ruling Communist Party to be held in the fall
• China will not join Western countries in implementing sanctions against Russia, according to the chairman of the China Banking and Insurance Regulatory Commission. Total trade between the two countries climbed roughly 36% in 2021 to a record USD 146.9 billion, according to Chinese customs data, which revealed that Russia ran a trade surplus with China and was a key source of oil, gas, coal, and agriculture commodities
• Chinese markets retreated as the war in Ukraine and disappointing economic data dampened risk appetite. The Shanghai Composite Index dipped 0.1%, and the blue-chip CSI 300 Index retreated 1.7%
Sources: T. Rowe Price, MFS Investment Management, Handelsbank Capital Markets, TD Economics, M. Cassar Derjavets
