January 18, 2022
“China warns the US and Europe the speedy rise in interest may interfere with the global recovery from the COVID-19 outbreak. Central banks are advised to preserve the monetary stimulus while dealing with spillover effects.”
Sam Cornford, Partner – Head of Trading
As we emerge from the pandemic, Biden’s economic policy bungling is driving America into a brick wall of dissatisfaction and stagflation. The outlook for economic growth in the first quarter and 2022 is darkening amid the latest wave of Covid-19. The combination of higher inflation, supply-chain constraints and the fast-spreading Omicron variant caused economists to trim their forecast for growth to 3.3% for the current year, based on the change in inflation-adjusted gross domestic product in the fourth quarter of 2022 from a year earlier, from 3.6% in October. The economy faces a delicate balancing act this winter, economists say, as the rapid spread of the Omicron variant threatens to dent consumer spending and exacerbate labour and supply-chain shortages as workers call out sick. Meantime, the Federal Reserve is under pressure from businesses and consumers to tame inflation, which recently hit its fastest pace in nearly four decades.
The UK is exploring a radical intervention in the power market, under which the state would make payments to energy suppliers when wholesale gas prices rise sharply in a bid to soften the blow to consumers. The proposal, has been promoted by energy companies, and is described by government insiders as “plausible” and “logical.” Nevertheless, they admit there might be many downsides to such a step. Under the initiative, energy suppliers would receive payments from government when wholesale gas prices exceeded a certain threshold so they would not then have to pass the increase on to consumers. Chancellor, Rishi Sunak, acknowledges this could leave the taxpayer heavily exposed if wholesale prices remain high, but he has been discussing with Boris Johnson ways to mitigate a cost-of-living crisis, officials say. In the meantime, business secretary Kwasi Kwarteng will hold fresh talks with energy companies this week as the government narrows its options for insulating consumers from a forecast 50% increase in bills.
Sterling is stronger against euro and weaker against the dollar this morning. UK inflation is expected to rise to a 30-year high when December’s data are released on Wednesday as upward cost pressures are felt across the economy. Boris Johnson is facing further pressure as two ministers slammed him over lockdown-busting parties in No 10 just hours after Dominic Cummings said he would take the stand having accused the Prime Minister of misleading Parliament. Cummings said he would “swear under oath” that Johnson was aware of and allowed the May 2020 drinks gathering, which took place at the height of the lockdown during the first wave of the pandemic. British employers added a record 184,000 staff to their payrolls in December, showing little impact from the Omicron variant of coronavirus, while job vacancies hit a new record high, potentially fuelling the Bank of England’s inflation worries. Job vacancies soared to a record high of 1.24 million between October and December, according to new data. Concern about possible labour shortages and pay pressures over the medium term was a major reason why the Bank of England raised interest rates last month for the first time since the start of the pandemic.
Euro is weaker than most major currencies in the early morning trade. Germany’s foreign minister said on Monday she hoped tensions with Russia over Ukraine could be solved by diplomacy, but she warned that Moscow would suffer if it does attack its neighbour. Britain has sent an anti-tank missile system to Ukraine to help the country defend itself from a Russian invasion. Ben Wallace, the defence secretary, said last night that a small number of UK personnel would also travel to the country to provide training on the short-range system considering Russia’s “increasingly threatening behaviour”. Tens of thousands of people took to the streets across Germany on Monday night, as citizens vented their frustrations over the country’s coronavirus measures. Many of those who attended brandished signs and banners to show their disapproval of a possible vaccine mandate. Denmark registered a record number of coronavirus infections on Monday, as cinemas, museums and other cultural institutions reopened after a month-long COVID-19 lockdown.
The dollar is well bid against most major currencies overnight. Joe Biden ends his first year in office at a particularly bleak moment for a US president who promised competency and normalcy. Much of his domestic agenda is halted on Capitol Hill, impeded by members of his own party. Bill Galston said Biden’s administration has “not done a good job of managing expectations” around Covid. President Biden has a chance to remake the Federal Reserve Board of Governors by filling multiple vacancies. This may be particularly important given inflation’s breakout, yet Mr. Biden’s latest nominees seem less worried about prices than pushing progressive policies that aren’t the Fed’s job. The forthcoming rollout of high-speed 5G telecoms services threatens to ground flights across the US, America’s largest airlines warned on Monday, as they urged government agencies to intervene to avoid “chaos” for passengers and “incalculable” disruptions to supply chains.
US equity futures withdrew, and Asian stocks struggled Tuesday amid a jump in Treasury yields as investors girded for interest-rate hikes by the Federal Reserve to quell high inflation. Treasuries fell across the curve, pushing two-year and 10-year yields up to levels last seen before the pandemic roiled markets. Pressure is growing for the Fed to act more quickly to contain price pressures, which are being stoked in part by a rally in oil that’s taken Brent crude to the highest since 2014. Nasdaq futures are down almost 1% on Tuesday, making it likely the tech-heavy index will add to its year-to-date losses of around 4.5%. Having risen for 12 of the past 13 years, it is under heavy pressure from the prospect of higher interest rates and bond yields, more so than the broader S&P 500 index or MSCI’s global equity benchmark. A US Senate panel is set on Thursday to debate a bill that aims to rein in app stores of companies that some lawmakers say exert too much market control, including Apple Inc (AAPL.O) and Alphabet Inc’s Google (GOOGL.O).
Main Economic Data/Central Banks/Government (All Times CET)
8:00 a.m.: U.K. Dec. jobless claims; Nov. three-month unemployment rate
8:30 a.m.: Switzerland Dec. producer and import prices
10:00 a.m.: Italy Nov. trade balance
10:30 a.m.: Spain sells bills
11:00 a.m.: Germany Jan. ZEW survey
11:00 a.m.: U.K. sells bonds
3:15 p.m.: Riksbank’s Ingves speaks
6:00 p.m.: ECB’s Villeroy speaks
Earnings include Goldman, PNC Financial, Bajaj Finance, L&T Technology Services, United Urban Investment
Bloomberg’s “The Year Ahead” virtual conference starts, with speakers including CEOs of Intel, Visa and Cisco
To learn more about Ballinger & Co., please visit our website or our LinkedIn page.