Week in Review: Inflation Worries Continue

Market volatility continued into the second week of 2022, with inflation concerns at the forefront. A multi-decade increase in U.S. consumer prices was a reminder that inflation is a key risk for the year ahead, impacting central bank policy. U.S. consumer prices increased by 7.0% in December on a year-on-year basis, the largest 12-month increase since June 1982. Core inflation excluding food and energy rose 5.5%, the most since February 1991. Despite this, numbers were largely in line with market expectations.

Fed Chair, Jerome Powell responded at his renomination hearing before Congress, assuring lawmakers that high inflation is a "severe threat" to the U.S. economic recovery, and the Fed will do what's needed to rein it in. He stopped short of telegraphing a March hike and said in the longer term he's optimistic the disruption between supply and demand will abate. Following December’s inflation print, an increased number of analysts now expect four interest rate hikes in the U.S. for 2022.

Fourth quarter earnings also kicked off this week, with financial majors JPMorgan Chase and Citigroup amongst the first to report. Both companies disappointed markets, reporting lower profits.

In Europe, Germany reported that its economy grew by 2.7% in 2021, below pre-pandemic growth levels, in part due to coronavirus restrictions and supply bottlenecks. Eurozone unemployment dropped to 7.2% in November, compared to October’s 7.3% reading.

The U.K. surprised to the upside reporting that its economy grew by 0.9% in November 2021, compared to expectations of 0.4% growth. It also reported that its economy is 0.7% bigger than it was in February 2020, when the U.K. first went into lockdown.

China’s trade surplus rose to a record USD 676.43 billion in 2021, the highest since 1950, when the country began recording data. Both exports and imports slowed in December, suggesting that the world's second-largest economy is showing signs of slowing. Nevertheless, exports came in just above expectations, buoyed by ongoing solid global demand.

China has vowed to accelerate investment in more than 100 key national projects and boost domestic consumption to help stabilise growth, as pressure on the economy rises amid worsening domestic Covid outbreaks. “The economy is at a crucial juncture of overcoming difficulties,” according to a statement on the government’s website released after a Monday cabinet meeting chaired by Premier Li Keqiang. “We must make stabilising growth a higher priority and firmly implement the strategy of expanding domestic demand.”

China’s consumer price index (CPI) and producer price index (PPI) both came in below expectations in December. CPI was recorded at 1.5% compared to expectations for a 1.8% increase and PPI advanced 10.3%, lower than market expectations of a 11.1% increase. This gives China’s central bank scope to cut its key policy rate, a first such move since April 2020.

Global equities were mostly softer this week. In the U.S., the Dow Jones (-0.88%), S&P 500 (-0.30%) and Nasdaq (-0.28%) were all in negative territory. Similarly, the Euro Stoxx 50 (-0.78%), Nikkei 225 (-1.24%), and Shanghai Composite Index (-1.63%) were all negative. The exception was the FTSE 100 (+0.77%) ending the week stronger. Brent crude oil advanced to USD 86.36 a barrel, up +11.03% year-to-date.

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Market Moves of the Week

The South African press is running with a statement that a campaign to oust South African President Cyril Ramaphosa as head of the ruling party is underway. Ahead of a December conference where party members will vote on senior leadership positions, Tourism Minister Lindiwe Sisulu criticised the nation’s top judges as “mentally colonised” and said not enough has been done to address the legacies of apartheid including poverty and land inequality.

South African vehicle sales fell by 3.5% on a year-on-year basis in December and is expected to decline by about 8% in 2022. This follows the strong 22.1% year-on-year rebound in sales in 2021, after the massive 29.2% Covid-19 pandemic-related decline in sales in 2020. Mikel Mabasa, CEO of automotive business council Naamsa, said that the improvement in the new vehicle market is expected to continue at a slower pace in 2022, in line with the lower projected GDP growth rate for the country.

JSE listed companies posted strong returns for the week. The JSE All-Share Index was up +1.65%, led higher by the resource (+3.29%) and financial (+1.66%) sectors, whilst industrial shares (+0.59%) were also well supported. By Friday close, the rand was trading at R15.39 to the U.S. Dollar.

Market Moves_16 Jan 2022
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Chart of the Week

A lot of questions have been asked about America’s so-called Great Resignation and what’s causing it (other than the pandemic). There has however been another related phenomenon transpiring in the U.S., one that’s equally significant. It’s called the “Great Retirement,” with a remarkable increase in the rate of “Baby Boomers” (people aged 57 – 75) choosing to retire. Whilst this is to be partially expected due to this age group starting to reach retirement age, the pandemic has accelerated matters. A shrinking working-class is expected to put pressure on the state and wages.  Source: Bloomberg

Chart of the Week_16 Jan 2022

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