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Week in Review: U.S. Inflation Spikes

The three major U.S. indexes slid sharply on Friday after U.S. and U.K. officials warned again of a potential military action by Russia against Ukraine. The news sent oil prices surging, while stocks and bond yields fell.

US officials are concerned that Russia could launch an invasion at any time, even before the end of the Winter Olympics in Beijing. Over the weekend more than a dozen countries have urged their citizens to leave Ukraine as soon as possible. The current tensions come eight years after Russia annexed Ukraine’s southern Crimea peninsula. Since then, Ukraine’s military has been locked in a war with Russian-backed rebels in eastern areas near Russia’s borders. The Kremlin says it wants to enforce “red lines” to make sure that its former Soviet neighbour does not join Nato.

January’s headline U.S. consumer price index (CPI) surged to 7.5% year-over-year, more than consensus expectations and its highest annual gain since February 1982, the Labor Department reported Thursday. Excluding the volatile food and energy components, prices increased 6% from a year ago and 0.6% from a month earlier. The higher than expected inflation reading showed services inflation picking up, but that goods inflation is starting to ease with pandemic related supply disruptions starting to improve.

Some market commentators are now expecting an accelerated rate hike schedule by the Fed—including the probability of a 50-basis-point rate increase at the central bank’s March policy meeting.

U.S. 4th quarter corporate earnings continue to exceed estimates with about 70% of the S&P 500 companies having reported results, earnings growth is running at around 30%. However nearly 75% S&P 500 companies have commented on rising inflation during their earnings conference calls for the fourth quarter.

In the U.S. the tech-heavy Nasdaq Composite ended the week 2.18% weaker, while the S&P 500 was 1.82% weaker and the Dow Jones Industrial Average ended 1% weaker.

In contrast, shares in Europe ended the week stronger, buoyed by strong corporate earnings. In local currency terms, the pan-European STOXX Europe 50 Index ended 1.68% higher. While the UK’s FTSE 100 Index climbed 1.92%, helped by news that the British economy grew 7.5% in 2021, rebounding from its historic 9.4% plunge in 2020. The Bank of England now expects inflation to peak at 7.2% in April and has imposed back-to-back interest rate hikes for the first time since 2004, taking the main Bank Rate from 0.1% to 0.5%.

In Asia, Japan’s stock markets ended positive for the week, with the benchmark Nikkei 225 Index rising 0.93% supported by solid corporate earnings. Chinese stocks also rose amid supportive official comments suggesting that regulatory curbs on the internet sector would become more rules-based, raising the prospect that the government’s crackdown on the tech sector would ease. The Shanghai Composite Index gained 3% for the week.


Market Moves of the Week


The International Monetary Fund (“IMF”) warned on Friday that South Africa’s economic recovery remains fragile and that growth is expected to hold below 2% in the medium term because of policy uncertainty, high public debt and constraints to investment. The IMF forecasts South Africa’s economic growth at 1.9% in 2022 after an estimated 4.6% rebound in 2021.

President Cyril Ramaphosa delivered his State of the Nation Address (Sona) on Thursday, focusing on the economy, regulatory reform, measures to assist small business, the improvement of water management and to secure a stable electricity supply. The Basic Income Grant (BIG) of R350 was extended for another 12 months to March 2023. The president also intimated that the end of the national State of Disaster was being finalised. Focus now shifts to the looming budget speech on 23rd February.

The FTSE/JSE All-Share Index (Alsi) had a strong week overall, closing 1.56% higher at 76 383 points on Friday. Financial (+3.08%) and resource counters (+2.55%) were well supported over the week. The rand strengthened against the U.S. dollar over the week briefly trading at the R15 per dollar level on Thursday, but by Friday close, the rand was trading at R15.21 to the greenback.


Chart of the Week

Inflation Jan 2022

US consumer prices rose 7.5% in January compared with a year ago, the biggest jump in 40 years, the US Department of Labor reported on Thursday. Economists had expected the annual figure of 7.3%. Excluding the volatile food and energy components, core prices increased 6% from a year ago. The data reinforces the Fed’s intentions to begin raising rates at the bank’s March meeting.

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