By Renée Friedman, PhD
The week in summary:
Welcome to Macro Insights #10. The uncertainty around the Omicron variant and the hope that it may, even if more transmissible, not be as deadly as other Covid variants, helped push US markets this past week. Although there are still concerns about the efficacy of existing vaccines in response to Omicron, with Pfizer/Biotech now saying that a third booster shot would provide adequate defense against the Omicron variant and the data on others still not clear, it seems equity markets are responding more towards how central banks will act on inflation than the politics and policy of dealing with Omicron.
In the US, Treasury yields rose during the week to over 1.5% on the expectation that the economy would continue to grow and inflation continues to rise as labour shortages continue. On a very positive note for global markets, a deal to raise the US debt ceiling appears to be ever closer with the House of Representatives on Tuesday in a 222-212 vote approving legislation that would allow for a swift increase in the debt ceiling despite Republican opposition. The measure would create a way, to be used only once, for the Senate to raise the debt limit by a specific amount with a simple majority vote and avoid the 60 vote filibuster threshold. It would ensure that the US Treasury will be able to meet its obligations before the current 15 December deadline, the date at which Treasury Secretary Janet Yellen has said the US would breach the statutory limit on its ability to borrow to finance the federal government’s obligations. US stock markets remained relatively positive this past week following Friday’s drop with technology and cyclicals performing well. The S&P 500 is up almost 3% so far this month and the Nasdaq up about 1.6%.
In the UK, Bank of England Deputy Governor Ben Broadbent this past Tuesday said that inflation in Britain might "comfortably exceed" 5% in April next year and the country's tight labour market was likely to be a more persistent source of inflation. The GBP has fallen this week while the FTSE 100 continued to recover from last Friday’s sudden drop and perform well with an almost 3.6% rise so far this month.
In Europe, the Eurogroup (the group of Eurozone finance ministers) agreed to continue moderately supportive fiscal policy next year.They said that the euro area economy is recovering from the recession faster than expected and supported the European Commission forecasts for GDP growth of 5% in 2021 and 4.3% in 2022. The Europe-wide Stoxx 600 was up this week, with tech stocks and cyclical businesses rising. It is up about 2.9% so far this month while the DAX is up about 3.5% this month and the CAC up over 3.6%.
And on the digital front Bitcoin experienced one of the biggest one day sell-offs on Wednesday on the same day the Bank of France and the Swiss National Bank said they had successfully attempted foreign exchange transactions using digital currencies. It will no longer just be inflation concerns and rising demand due to the likes of Tesla and other large companies accepting payment in Bitcoin that will be changing the crypto market; expect a bumpier ride as the actual implementation of central bank digital currencies (CBDCs) and accompanying regulation starts to hit markets in late 2022.
Oil and natural gas prices reacted negatively to the emergence of Omicron on fears that it would lead to the reimposition of widespread travel restrictions and severely reduce oil demand. The price drop was also attributed to the OPEC+ decision to continue to increase production by 400,000 barrels a day in 2022.
Things to look out for this coming week:
- In Europe on Friday we’ll get German harmonised CPI data, and Italian Industrial data. On Monday there is Italian trade data and on Tuesday Eurozone Industrial production data. On Wednesday there is French, Italian and Spanish CPI data. On Thursday there is Eurozone labour cost and trade balance data but the big news for the week for Europe is the ECB rate decision on Thursday. Multiple members of the ECB board have said that above target inflation will persist longer than originally expected (until at least the end of 2022). A surge in Covid cases and the rise of the Omicron variant are threatening growth in Europe. Therefore the ECB may seek to either expand its asset purchases programme (APP), currently running at 20 billion euros a month, or temporarily extend the Pandemic Emergency Purchase Programme (PEPP) scheme that is due to end in March 2022. Expanding the APP would help keep bond yields low after the PEPP ends.
- In the US on Friday there is November CPI data and the Michigan Consumer Sentiment Index. On Tuesday there is producer price index data. On Wednesday all markets will be tuned to find out if the Fed has decided or not to increase the taper speed and what else it is thinking in terms of the conditions for its first rate rise next year. With initial jobless claims coming in at only 184,000 this week, the lowest since 1969, concerns about the state of the labour market may not be serious although labour participation rates are still below pre-pandemic levels. On Thursday there will be initial and continuing jobless claims data, retail sale data, building permits data and the Philadelphia Fed Manufacturing Survey.
- In the UK there is a slew of data on Friday that will be critical to the next Bank of England meeting on the 16th of December. On Friday there will be GDP data for October (m/o/m), Index of Services data, Industrial production data, Manufacturing production data, trade balance data and consumer inflation expectations data. On Monday the Bank of England will release its financial stability report. On Tuesday there is average earnings, claimant count and ILO unemployment data. On Wednesday there is the Consumer Price Index, PPI core output, the Producer price index, Retail Price Index and Market Manufacturing PMI data. The next BoE meeting is on Thursday but despite even more data showing the: labour market tightening the threat of closures and the economic impact that would have on the economy may yet again stop the BoE from raising rates.
Mixed messages and the law of unintended consequences
Earlier this week the US the White House said no official US diplomatic delegation would be sent to the 2022 Winter Olympic Games as a statement against China's "ongoing genocide and crimes against humanity in Xinjiang. China reacted angrily with the spokesman of the Chinese Mission to the UN saying, “The US just wants to politicize sports, create divisions and provoke confrontation." But how effective will this intended stick be when the White House turned around 2 days later and gave China a great big carrot?
US President Joe Biden signed an executive order that by 2030, the federal government will reduce its greenhouse gas emissions by 65 per cent and plan to achieve net zero emissions by 2050. To achieve the 2030 target, the government will transition to completely zero-emissions vehicles and buildings. Only 0.5% of the government's 657,000 vehicles were electric as of 2020. Biden’s order will direct federal government portfolio of 300,000 buildings, 600,000 cars and trucks, and annual purchasing power of $650bn in goods and services to be net zero by 2050,
The implications of this order are huge for commodity producers of the precious metals used in EV batteries, for the factories making these batteries, and for the producers of EVs. However, in the rush to “green” the economy, the law of unintended consequences strikes again. Seeing that China is the major producer of EVs, of these batteries and the Chinese control the majority of the mines where the rare earth metals are mined, the Chinese just got a major gift to their economy from President Biden. As noted in a 25 November article in the UK’s Guardian newspaper, Tesla, probably one of the world’s best known EV proponents, has a factor in in Shanghai which now produces more cars than its plant in California, some of the batteries that drive them are Chinese-made and the minerals that power the batteries are largely refined and mined by Chinese companies. And these companies primarily rely upon coal-fuelled electric power plants; hence legislating an increased demand for these goods will likely negatively impact carbon emission levels. According to the South China Morning Post Chinese battery-maker CATL controls about 30% of the world’s EV battery market while Chinese owned cobalt producers control about 85% of that market.
In short, this should leave all those interested in promoting ESG and building back greener very red faced as it doesn’t seem like the stick will hurt at all.
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