EXANTE Macro Insights

EXANTE Macro Insights

By Renée Friedman, PhD

The week in summary:

Welcome to Macro Insights #9. Over the past week, US markets reacted to Fed Chairman Jerome Powell re-appoint for a second term with the S&P 500 dropping before rising slightly towards the end of the week, the dollar rose as expectations of rate hike taking place by June 2022 became more entrenched based on initial jobless claims falling to a 52 year low. Oil prices remained relatively stable with Brent at around $82/barrel despite the US pledge to release 50 million barrels of strategic reserves. OPEC expects the U.S. release to swell a surplus in oil markets by 1.1 million barrels per day (bpd). OPEC+ will meet on Dec. 1-2 to set policy. 

Germany has a new government with Olaf Scholz, the incoming chancellor from the center-left Social Democrats, forming an agreement with the Greens and the pro-business Free Democrats .Germany's Ifo index of business sentiment in November was 96.5, below forecast, meaning that Europe’s largest economy is looking at a gloomy Q4. European markets were down and the Euro slid to a 16-month low against the dollar this past week amid renewed concerns about a Covid resurgence in Europe and persistent supply bottlenecks weighing on output before recovering later in the week. On a year to date basis, the Euro is down over 8% against the USD.

In the UK retail sales rose 0.8% m/o/m in October, the highest since April. The retail sales data, along with recent strong job numbers, and the highest level of inflation in a decade, are likely to solidify expectations the Bank of England will make its move in December. Governor Andrew Bailey said risks to the U.K. economy are “two-sided”, with slowing growth and rising inflation, echoing comments made by Chief Economist Huw Pill.

Emerging markets were hit by the collapse in the Turkish lira to its lowest level ever against the USD as the central bank continued to cut rates while inflation surges past 20%. President Erdogan has continued to pile on pressure on the central bank including dismissing the bank deputy governor last month, to create an easing cycle he thinks will boost exports. The central bank has slashed the policy rate by more than 400 points since September. The Lira has shed 45% vs dollar this year.

Things to look out for this coming week:

  • In the Eurozone on Friday look out for speeches from ECB President Lagarde and board members Schnabel and Panetta. On Monday there is Eurozone consumer and industrial confidence data and November’s business climate index. In addition there is German CPI. On Tuesday there is French GDP, PPI and CPI data. Germany’s unemployment data. On Wednesday there is a raft of Markit manufacturing PMI data from Spain, Italy, France, Germany and the Eurozone. Also German retail sales data is due on Wednesday in Europe’s largest economy.  On Thursday there is the Eurozone Producer Price Index and the Unemployment rate data. 
  • In the US on Monday there is US pending home sales data. On Tuesday the housing price index, S&P/Case-Shiller House Price Index, the Chicago Purchasing Managers Index and Consumer Confidence numbers will be released. On Wednesday there is the Markit Manufacturing PMI and ADP employment data which will be watched closely by the Fed following this week’s surprisingly low new claims number. On Wednesday there is also ISM Manufacturing PMI, ISM Manufacturing prices and ISM Manufacturing employment, all of which are indicators of the economic cycle and labour market conditions. The Fed’s Beige Book, which reports on the current US economic situation, is also released on Wednesday. On Thursday there are initial and continuing jobless claims. 
  • In the UK on Wednesday there is Markit Manufacturing PMI.

Will countries really build back better? 

During the height of the pandemic much was made about the need to “build back better” once economies reopened. Who the pandemic affected most in regions across the world highlighted the influence of income, access, and the overall issue of inequality that exists between different members of society. As noted by Jonathan Weisman in a 19th November 2021 article in The New York Times “it laid bare economic stagnation in the middle class and the soaring wealth of the super rich.” Consumers and investors, ever more reliant on social media as we all sat in our homes, heard stories of poor treatment of employees by some companies, and reacted by selling shares and/or not buying from those companies. Governments, in response to these growing social pressures, vowed that inequality and inequity would be addressed as part of the post pandemic recovery. 

These kind words and good intentions may yet be overshadowed by sticky inflation. The rapid rise in global inflation, fuelled by a surge in demand for energy and goods once these economies started to re-open and also, in some countries, by direct fiscal transfers to individuals or companies, is causing policymakers and even consumers to have a rethink. Although central banks initially called it “transitory, inflation is proving far stickier as raw material shortages, labour shortages, high shipping costs, and supply bottlenecks continue. So the question of being able to “build back better” without adding to inflationary pressures that are already forcing some central banks, in response to changes in inflationary expectations, to act more quickly than they initially anticipated, does become a societally relevant one. There are rising political pressures on central banks to act as populations, used to years of virtually no or “too low” inflation, are hitting the panic button, resulting in a slowdown in growth. Given that Covid is resurging in parts of the world (and was never truly contained in others), it could create a perfect storm for policymakers if continuing supply problems along with labour shortages, rising wages and uncertainty over how real rising  productivity rates are, lead to stagflation. 

And although the earlier calls for building back better recognised the need for improving equality of opportunity for workers, the noose is tightening on central banks and policy makers to act  as tightening labour markets, skills mismatches, and the structural barriers still existing in some countries, notably in Europe, may make such promises hard to fulfill. There will likely be an increase in debates over the next few months about how new EU spending programmes, promises made in the UK Autumn budget, and the recently passed Infrastructure bill in the US may all affect inflation.  And despite US President Biden’s $1.75 trillion social and climate plan passing the House last week, it will likely undergo some serious revisions for it to pass Senate scrutiny. 

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