- Multi-decade high inflation is weighing on consumer sentiment in the US with the University of Michigan Consumer Sentiment index falling to 61.7 for February, down from 67.2 in January. The February reading is the lowest level for the index since October 2011 and came in well below market expectations. As new daily cases of Covid are declining in the US it would appear that the virus is having less of an effect on consumer sentiment than high prices. The future expectations component in the index fell to 57.4, its worst level in over a decade. With no imminent prospect of inflation improving for consumers, consumption is likely to be a drag on growth activity in Q1 at least.
- The UK’s economy recorded growth of 7.5% in 2021, one of the strongest levels of annual growth among major developed economies, but still not enough to unwind the more than 9% contraction recorded in 2020. Growth in Q4 rose by 1% q/q and would have been faster if not for a monthly decline in December as consumers and businesses were interrupted by the spread of the Omicron variant of Covid-19. Services activity generally was weaker at the end of the year and while there are minimal restrictions in the UK in place now, the prospect of much higher prices could act as a deterrent to activity for the economy this year.
- Saudi Arabia has transferred a 4% stake in Aramco from direct government ownership to PIF, the kingdom’s sovereign wealth fund. The stake is valued at roughly USD 80bn and comes amid market chatter of further offering of equity in Aramco. The Aramco stake will help PIF on it was to having total assets under management of around USD 1trn by 2025.
Today’s Economic Data and Events
10:30 IN wholesale prices y/y Jan: forecast 12.7%
16:00 IN CPI y/y Jan: forecast 6%
Fixed Income
- Benchmark government bond markets tumbled again last week thanks to a surge in rate hike expectations—globally—following on the very high January inflation print in the US. A broad index of US Treasuries fell by 0.3% for the week as whole but there was some volatile trading toward the end of the week. Anxiety that an escalation of geopolitical tensions in Eastern Europe could occur as soon as this week prompted a move into havens at the end of the week, with yields on the 2yr UST and 10yr UST falling substantially, down 8bps to 1.4997% and down 9bps to 1.9371% respectively.
- European bond markets were closed by the time the haven rally took hold and still closed Friday lower with long-term yields up considerably. Yields on 2yr German bonds fell last week however, down by about 8bps to -0.334% as there is some pushback on expectation that the ECB could hike rates soon.
- Emerging market bonds generally were offered at the end of last week with Russian bonds, as would be expected, seeing a sharp drop on Friday. South African bonds closed the day lower but yields up only 1bps to 9.601% on the 10yr the move was relatively contained. Turkish bonds were generally stronger on the week but dipped on Friday with yields up 2bps. Fitch cut their sovereign rating on Turkey to ‘B+’ from ‘BB-‘ in light of high negative real rates in the country and currency volatility.
FX
- If the high January inflation print for the US didn’t help the dollar on the back of rising rate hike bets, the move toward haven assets at the end of last week certainly did. The dollar closed stronger against virtually all peers on Friday, save the Japanese yen. The broad DXY index closed up 0.6% last week to 96.082.
- EURUSD fell almost 0.9% on the week, and was down 0.7% on Friday alone, to settle at 1.1350. A military conflict in Eastern Europe could pose direct energy security challenges to Europe with little ability to offset their impact. GBPUSD managed to gain for the week as a whole, up by 0.24% with markets pricing in an aggressive six hikes by the end of the year.
- Commodity currencies generally closed stronger against the dollar last week with USDCAD down 0.16% to 1.2737 although the loonie was softer toward the end of the trading week. AUDUSD added 0.9% to close the week at 0.7137 while NZDUSD added 0.56% to close at 0.6651.
Equities
- The high inflation print and the resultant higher expectations for monetary tightening in the US weighed on equity markets at the close of the week, with US stocks in particular selling off on Friday. The three major indices all closed lower, despite the strong earnings results that had supported sentiment earlier in the week. The NASDAQ led the losses, dropping -2.2% w/w, followed by the S&P 500 (-1.8%) and the Dow Jones (-1.0%).
- Despite some losses on Friday these were less pronounced than in the US, and European equity markets held up over the week. The DAX closed up 2.2% w/w, the FTSE 100 2.0%, and the CAC 0.9%.
Commodities
- Warnings from the US over a potential imminent conflict in Eastern Europe helped energy prices surge at the end of trading. In an otherwise listless week of activity both Brent and WTI added more than 3% on Friday to close up on the week around 1% apiece. Brent closed at USD 94.44/b while WTI settled at USD 93.10/b.
- The IEA cautioned that the underperformance by OPEC+ to hit their production targets, thanks to underinvestment in some producers and deliberate restraint by Gulf producers, is helping to keep the oil market tight. The IEA warned that “more volatility and upward pressure on price” would continue unless there was a material adjustment from OPEC+ to increase production at a faster pace.
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