Economic Highlights

The number of mortgage approvals slowed again in November 2021 to 67k, following the trend since the end of the Stamp Duty Holiday. Even so, the total net mortgage lending increase of £3.7bn was above expectations. Consumer Credit growth also outstripped forecasts with an expansion of £1.2bn. Combined with the fact that excess savings appeared to decline slightly, there is a more than a hint that Christmas shoppers were out early, possibly fearful of supply shortages and/or more Covid-related restrictions. The final readings for Markit’s December PMI series showed slight upticks for both Manufacturing and Services, suggesting that the economy did not buckle under the strain of Omicron (although, in reality, there will have been some short-term disruption).

There were three shocks for markets to handle in the first week of January 2022, all of which put upward pressure on Treasury yields. First we had the minutes of December’s FOMC meeting, which revealed that Fed members were more concerned about inflationary pressures than they had previously revealed and therefore were considering a reduction of the central bank’s balance sheet (so-called Quantitative Tightening) earlier than had been assumed. Second, the latest JOLTS survey showed that a record 4.5 million employees had quit their jobs in December, a sign that workers are confident of moving to better and (crucially) higher paid employment. This was borne out by Friday’s employment data, which saw Average Hourly Earnings rising 0.6% month-on-month and 4.7% year-on-year, both well above forecasts. The headline Non-Farm Payroll gains of 199k were well below the expected 450k, but the separately polled unemployment rate dropped from 4.2% to 3.9%, providing further evidence of a very tight labour market. The Fed’s concern is that inflation and wages will feed off each other to create the dreaded upward wage/price spiral, and that is why they have turned more hawkish. In response, futures markets now price that a first interest rate rise of the cycle is probable in March and that there might be as many as four in total during 2022.

Having failed to create inflation anywhere near its 2% target, the European Central Bank (ECB) is probably not sure whether to celebrate or mourn the fact that headline consumer prices rose by 5% in December 2021. The core figure was a more subdued 2.6%, with the effects of very strong food and energy prices being stripped out, but they still have a strong impact on consumers’ buying power in the short term. An interesting new development came over the weekend as ECB member Isabel Schnabel suggested that the transition to a world of greener energy could have a more persistent inflationary impact. This represents a shift from the official ECB line that current inflationary pressures are temporary.

The latest Caixin PMI releases showed a welcome bounce in activity in December 2021. Manufacturing popped back into positive territory with a reading of 50.9 (49.9), with Services rising from 52.1 to 53.1 against an expected drop. Still, these are hardly boom times by historical Chinese standards, and overall growth in 2022 is still expected to remain below trend. Matters will not be helped in the short term by the country’s “zero-Covid” policy, which is likely to persist at least through the Beijing Winter Olympics in February, and possibly until the National Party Congress in the autumn. At least there has been some easing of monetary policy, but we should not expect stimulus to be very aggressive.