In February this year the World bank noted, “Inflation has come back faster, spiked more markedly, and proved to be more stubborn and persistent than major central banks initially thought possible.”
Rising inflation is being witnessed around the globe, with emerging markets and developed countries all feeling its impact. While the ultimate drivers of inflation in individual economies might vary, the persistent price pressure tops the list of concerns for nearly all global central banks.
On Thursday, US data indicated that the country’s inflation accelerated by 7.9% in February, its highest level since January 1982. Recent data released by the International Monetary Fund (IMF) indicated that 15 out of the 34 countries that it classes as “advanced economies”, saw their 12-month inflation running above 5%, a collective spike the like of which has not been witnessed in over two decades. Advanced economies, however, are not the only ones feeling the pinch, 78 out of109 emerging and developing economies(EMDEs) are also experiencing inflation above the 5% mark.
While many believe that the stimulus action by central banks has led to the inflationary pressure, there are more factors fueling inflation than overheating of economies, as seen in the US. A few of these factors include:
- Rising commodity prices, along with an increase in global demand. By January 2022,Oil prices were already up 77% compared to December 2020, and continue to rise on the back of supply concerns as economies emerge from their pandemic lockdowns.
- The events of the past two years, COVID-19 lockdown restrictions to be more precise, have led to severe supply shocks, with transport and shipping costs skyrocketing. According to the IMF Blog dated 17 January 2022, container costs have almost quadrupled since the start of the pandemic in early 2020.
- In EMDEs, the devaluation of currencies, caused by increased risk-off sentiment, has led to a rise in the cost of imported goods.
The world now faces yet another growth and inflation concern, in the form of the Russo-Ukrainian war, which has cast some doubt on central banks’ pre-war resolve to raise rates. The World Bank suggests that a delay in monetary policy tightening could cost global economies dearly and said, “To be sure, a more timely and robust policy response from major central banks would not be good news for EMDEs in the short run. Most would experience higher funding costs, and debt crises could become significantly more likely for some. Nonetheless, the longer-term costs of delaying action would be greater. Because the US and other advanced economies failed to tackle inflation quickly during the 1970s, they ultimately needed far more draconian policies, which led to America’s second-deepest post-war recession, along with a developing-country debt crisis.”
DATA IN A NUTSHELL
The number of Americans filing new claims for unemployment benefits increased by 11,000 to 227, 000 in the week ended 5 March, from a revised 216,000 in the previous period, overshooting market expectations of 217,000. On a quarter-on-quarter basis, the number of employed persons in the eurozone rose by 0.5% in the last three months of 2021, easing from an upwardly revised 1% advance in the previous period and in line with preliminary estimates. Among major European Union economies, employment rose the most in Spain, France, Germany and Italy. Year-on-year, employment advanced 2.2% in the fourth quarter. On Wednesday, the ECB surprised the market by speeding up the asset purchase schedule for the coming months. Monthly net purchases will now amount to €40 billion in April, €30 billion in May and €20 billion in June, compared to the previous targets which were set at €40 billion in the second quarter, €30 billion in the third quarter and €20 billion in the fourth quarter. Key interest rates, however, were kept at record-low levels.
China’s annual inflation rate stood at 0.9% in February 2022, unchanged from the previous month and in line with market forecasts. Still, the reading was the lowest level since September 2021, as the cost of food dropped by its highest rate in five months.
FAILED TALKS DRAG DOWN EUROPEAN EQUITIES
Volatility continued to grip the futures markets on Thursday as investors monitored developments surrounding the war in Ukraine and awaited consumer price data, for clues on the US Federal Reserve’s (The Fed’s) plans to hike interest rates. Recent talks between Russia and Ukraine’s foreign ministers in Turkey failed, as Moscow’s representative once again defended his country’s invasion of Ukraine, stating it was going as planned.
Europe’s major stock indices remained under pressure from a sharp sell-off on Thursday afternoon, following the meeting of the ECB. The DAX shed 3%, while the pan-European Stoxx 600 was down more than 1%, after seeing the strongest rebound since March 2020in the previous session. Auto stocks lead losses, while basic resources recouped their earlier losses. Full year 2021 earnings from Hugo Boss showed a net income profit of €144million, up from the company’s €219 million loss the year before, driven by stronger sales figures.
On the US Stock Market Index (US30), Amazon jumped over 6% in late Wednesday trading as it eyes a stock split and share buyback, while cyber security firm, Crowd Strike, rallied 13% on strong earnings and positive outlook. In regular trading on Wednesday, the Dow rose 2%, the S&P 500 gained 2.57%, and the Nasdaq was up 3.6%. The FTSE 100 traded lower on Thursday, eroding some of the 3.3% gains in the previous session, which was the sharpest daily increase since November of 2020. Market sentiment returned to the risk-averse side, as the prices of commodities are again rising sharply, which is fueling concerns over demand-destruction (permanent or prolonged loss of demand) and increased levels of inflation. On corporate news, Anglo-Australian miner, Rio Tinto, fell 6% on news that it became the first big miner to cut ties with Russian businesses.
URANIUM AT 10-YEAR HIGH, OILSEESAWS
Uranium futures extended gains above $54 per pound, its highest level since September 2011, amid mounting supply concerns and stronger global demand prospects. The Kremlin signed a decree that will include a ban on raw material exports, raising alarms about US uranium imports. The US nuclear energy sector produces 20% of the country’s electricity and relies on Russia for 16% of its total imports. Brent crude futures recovered more than 5% – as it headed towards $117 per barrel on Thursday -after shedding over 13% in the previous session. This was its biggest one-day drop in nearly two years, as investors digest comments from the United Arab Emirates(UAE) and the Russia-Ukraine war. On Wednesday, the UAE called on the expanded Organisation of Petroleum Export Countries, OPEC+, to boost production to ease turmoil in the energy markets. It bolstered its message by saying that the UAE is committed to OPEC plans. Countering the UAE’s calls, the head of OPEC and Chevron, John Watson, said there is no shortage of oil, while Iraq also insisted there is no need to ramp up the current planned production. On Monday, US oil futures hit their highest level since 2008,peaking above $139 per barrel, as supply chain problems created by the pandemic have been exacerbated by the war and the West’s economic sanctions on Russia.
Gold extended its losses to drop below $2,000 an ounce on Thursday after posting its biggest decline in 14 months, as risk sentiment improved on hopes for a diplomatic solution to the war. Gold and other commodities are coming off their recent highs, also driven by Russia’s invasion and ensuing sanctions. Meanwhile, investors remain concerned over the threat of an inflationary shock to the global economy. Chicago wheat futures eased further, moving from a 14-year high of $12.80 per bushel to below $11, after the United States Department of Agriculture’s outlook for world supplies topped all pre-report estimates, owing to a robust Australian crop. However, heavy sanctions and restrictive measures from Western economies on Russia have practically halted exports from the Black Sea region. Wheat export estimations from Russia were lowered by 3 million tons to 32 million, while those from Ukraine were cut by 4 million tons.
EURO CLAWS BACK GROUND
The euro appreciated to above $1.10 on Thursday, after rising 1.6% in its biggest daily jump since 2016 in the previous session. This after a more hawkish-than-expected ECB decision, when it said it may end asset purchases in the third quarter of 2022, earlier than previously expected.
The pound appreciated to above $1.31, recovering from $1.308, its lowest point since November 2020. Investor focus shifted to potential monetary tightening, with money markets pricing a total of 150 basis points of interest rate hikes from the Bank of England before the end of the year, with a 25 basis point rate hike expected next week.
The US Dollar Index bottomed around the 98.00 level on Thursday, moving further away from a nearly two-year peak of 99.40, touched earlier this week, as investors continued to monitor the outlook for inflation and developments surrounding the war in Ukraine.
The pound started the day trading at 1.3085/$ and 1.1908/€.
Written by Citadel Global Director, Bianca Botes.
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