Economic Highlights

The U.K. economy bounced back above its pre-coronavirus level in January, recovering from a slump in December when the omicron variant curtailed activity. GDP rose 0.8% month-on-month in January after falling 0.2% in December according to ONS figures. The gain was much stronger than the expected 0.1%. Services output rose 0.8% against consensus of 0.3% which reflected a rebound in retail sales and hospitality. Construction output was unexpectedly strong while production and manufacturing also beat consensus expectations.

Considering that the ONS pointed out that some firms had noted Covid infections had caused staff absences, these were healthy figures. Even within the Covid-related health programmes, the monthly fall in output was a comparatively mild 5%, as a steep 73% plunge in the number of vaccinations administered was largely offset by a 20% rise in NHS Test and Trace spending. Furthermore, health expenditure overall was up by 2.0%, adding 0.2% to GDP growth, helped by a 1.9% rise in GP appointments. One helpful factor for overall activity appears to have been some further, tentative, easing in supply chain disruptions, benefitting the construction sector in particular.

The US Consumer Price Index release for February was exactly in line with consensus expectations for both headline and core readings. In terms of the CPI details, the release saw year-on-year CPI rise to +7.9%, which is the highest in 40 years, and the month-on-month print rose to +0.8%. Core also accelerated to +6.4% year-on-year, which was similarly a post-1982 high. The University of Michigan consumer confidence index fell to an eleven-year low of 59.7. It was the expectations component that did the damage, falling from 59.4 to 54.4. The war in Ukraine was a noted factor, coming on top of already high gasoline prices, which have only risen further. Unsurprisingly, one-year inflation expectations jumped up by 0.5% to 5.4%, the highest reading since 1981. There was better news on the long-term 5-10 year expectations, which were unchanged at 3%. The Fed cannot afford to let that anchor go, which is one reason why rates are still expected to rise on Wednesday.

The ECB made its first policy decision since Russia’s invasion, adopting a more hawkish position than had been anticipated by announcing a faster reduction in asset purchases. This led to a sharp selloff in sovereign bonds as well as a significant widening in peripheral spreads. Net purchases under their Asset Purchase Programme will fall from €40bn in April to €30bn in May and then €20bn in June. The bank may end purchases in Q3. The inflation forecast for 2022 was upgraded to +5.1% (vs +3.2% in December), and to +2.1% (vs +1.8%) for 2023. There were indications that a rate rise could come as soon as September.

Total social financing and RMB loans decelerated sharply in February and were well below market expectations, after reaching record-high levels in January on the back of policy support. If one aggregates January and February credit data, TSF growth averaged 12.7% month-over-month annualized, which still represents an acceleration of broad credit growth compared with Q4 2021. However, in light of intensified headwinds to activity growth (due to the property downturn and another local outbreak of Covid), the scope for further policy easing remains high. This is made easier for the authorities by the fact that China is one place where inflation remains subdued. CPI is running at +0.9% year-on-year, with the index benefitting from a sharp reduction in pork prices following a price squeeze last year after a widespread outbreak of swine flu led to culling of pig herds.