Sterling started the week on the front foot as no new restrictions were announced and optimism on the February interest rate remains. But inflation continues to be an economic challenge as analysts expect a substantial increase in the energy price cap in April. Meanwhile, UK mortgage approvals edged lower as net consumer borrowing increased resulting in a muted response. The final manufacturing PMI was revised slightly higher to 57.9 from the flash reading of 57.6 – highlighting that the sector expanded slightly more than previously thought. The UK services-sector PMI was also revised higher from the flash reading but remains the lowest reading for 10 months. The latest Bank of England (BoE) survey indicates that companies expected to increase prices by 5% in the year ahead compared to 4.2% previously.
Looking to the week ahead, the main data release from the UK is the November GDP on Friday. It will cover the period before the impact of Omicron measures which could be seen as ‘dated’. Although, October GDP rose by only 0.1% on the monthly basis impacted by output reflecting supply-chain issues.
Will We See Four Hikes in 2022 from the US?
Last week was a busy week for the US with the release of the most recent Federal Open Market Committee (FOMC) report and jobs data. It showed that policymakers were onboard with plans to accelerate the withdrawal of the bond-buying programme, paving the way for faster rate hikes. According to the dot-plot of the individual projections, officials expect to raise rates three times in 2022 with another three hikes for 2023. The overall tone of the minutes showed that the Federal Reserve (Fed) officials seem confident that the US economy will recover strongly despite the risk of Omicron. The hawkish nature of the minutes has resulted in Goldman Sachs Group predicting four hikes this year stating that hikes may continue in March, June, September, and December.
On Friday, the US non-farm payrolls increased to 199k for December compared to the consensus forecasts of 400k. However, the unemployment rate declined to 3.9% from 4.2% – the lowest rate since February 2020. This partly reinforces the theory from the FOMC that we could be approaching full employment.
Looking to the week ahead, there are numerous Fed speakers next week as markets attempt to gauge their take on the economic outlook and the likely policy reaction. New voting members for 2022 also appear to be more hawkish than last year. Their current tone will be important as the FOMC minutes came before the increase in Omicron cases in the US. The market will look for clues on the pace of tightening and whether there will be three or four rate hikes. In terms of economic data, the market will focus on the pace of inflation on Wednesday and consumer spending on Friday.
Single Currency Lags as Monetary Policy Trails
The single currency remains under pressure as it trails to its counterparts in terms of the tightening cycle with rate hikes predicted for 2022. The market will continue to look for signs of this changing. Last week, Governing Council member Martins Kazaks stated that the European Central Bank (ECB) stands ready to act if the inflation outlook strengthens. With the gradual phasing out of the European bond-buying programme, there’s a small chance of a 10 basis-point hike by close of play this year and another by March 2023 despite Christine Lagarde’s comments that an interest rate hike this year is unlikely.
Meanwhile, German Prelim CPI month-on-month figures showed that consumer prices had increased by 0.5% in December with year-on-year inflation increasing to 5.3%. This represents the highest rate for German inflation since June 1992 driven mostly by the soaring cost of energy and previous VAT cuts. German factory orders read above the forecast, increasing by 3.7% versus an expectation of 2.1% and a negative reading of 5.8% previously. This provides a positive early indicator for future manufacturing activity within Germany.
Looking to the week ahead, it’s fairly quiet with German full-year (2021) GDP which we expect to show a rise of 2.5% – assuming contraction in Q4 due to renewed lockdown measures.
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