Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
UK inflation hits a new 40-year high
The cost of living squeeze in the UK shows no signs of abating. The Consumer Price Index (CPI) continued to climb, rising to a new 40-year high of 9.4% in June from May’s 9.1% reading to beat market expectations of 9.3%.
The increase was led by petrol prices, which chalked up their largest monthly rise since records began in 1990. Indicating a broadening-out of price increases, the cost of food also increased by 1.2% over the month. With an increase in the energy price cap yet to come in October, it seems unlikely that UK CPI figures will subside any time soon.
This places more pressure on the Bank of England to raise rates at a faster pace at its next meeting, in August. The UK has one of the highest inflation rates in the G7 group of economies, and there is mounting concern that this will combine with slowing economic growth to produce a prolonged economic downturn. The Bank’s governor, Andrew Bailey, has signalled that a 0.50% increase in interest rates is ‘on the table’, double the 0.25% rise previously expected.
ECB raises rates for the first time in over a decade.
The European Central Bank (ECB) raised interest rates by 0.50%, exceeding forecasts and contradicting its own forward guidance from June, which indicated a 0.25% rate increase. EU inflation reached 8.6% in June, prompting the ECB’s first rate rise since 2011 and a move away from negative deposit rates.
Given the uncertain picture across the euro zone, the ECB has abandoned forward guidance and opted instead to respond to inflation data in order to deliver its 2% inflation target. This raises the possibility of another 0.50% increase at the next ECB meeting in September. The ECB also unveiled its new Transmission Protection Mechanism, which is intended counter disorderly market dynamics and reduce the potential for EU fragmentation.
PMI data is piling further pressure on the ECB. These figures, which measure the activity levels of purchasing managers in the manufacturing and services industries, are seen as leading economic indicators, with readings below 50.0 indicating an economic contraction. Data for the euro zone fell from 52.0 to 49.5 over the month to June. Of particular concern was the fall in the services figure, which dropped from 53.0 to 50.6. Whilst still marginally in expansion territory, the broad-based nature of the declines heightens concerns that the post-lockdown economic bounce has ended.
PMI data from Germany, the euro zone’s largest economy, fell from 52.0 to 49.2. Germany is highly dependent on Russian gas and has been acutely affected by Russia’s recent reduction in gas deliveries via the Nord Stream 1 pipeline. The supply cuts are ostensibly for maintenance reasons, but raise the possibility of further, politically-motivated restrictions once this work is finished.
It was a positive week across equity markets, with the NASDAQ posting the biggest gain in the US, ending the week up 3.3%. Despite worrying economic data, the Euro Stoxx 50 index of euro zone equities finished the week up 3.5%.
Bond markets also had a positive week, the BAML UK Gilt index ending up almost 2%, and the BAML 10+ yr Gilt index up almost 3%.
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