Central banks abandoned talk of inflation being temporary, with worries about high inflation being “persistent” outweighing concern over the Omicron variant. The European Central Bank and US Federal Reserve sharply scaled back their bond-buying programmes. UK and Norway raised interest rates, and nine emerging economy central banks also pushed rates higher. Even the Bank of Japan, more often concerned with deflation, dialled back its coronavirus crisis monetary support.

UK

The FTSE 100 eased 0.3% over the week.

UK inflation hit 5.1% in November, the highest level in a decade.

The Bank of England raised the UK base rate to 0.25% and indicated that further rate rises can be expected in 2022.

In the latest bi-election, the Liberal Democrats overturned a Conservative majority of more than 26,000, placing further pressure on Boris Johnson who suffered a rebellion from Tory backbenchers over tighter COVID-19 restrictions.

Lord Frost, the UK’s Brexit negotiator, resigned, citing “differences in direction” with the government’s stance on taxes, the push towards net-zero and pandemic restrictions.

The flash CIPS/IHS Markit UK composite purchasing managers’ index fell from 57.6 in November to 53.2 in December, dragged down by a sharp drop in service sector activity as new virus restrictions hit consumer confidence.

COVID-19 cases jumped sharply over the week, particularly in London where the Omicron variant became dominant.

US

The S&P 500 fell 1.7% over the week, while the tech-heavy Nasdaq lost 3.0%. Tech stocks are particularly sensitive to interest rates as their value is based on the prospect of future growth, which is diminished by higher borrowing costs.

The week saw a rotation into healthcare, real estate, utilities and consumer staples stocks and out of energy, consumer discretionary, technology and industrials ones.

The US Federal Reserve pledged to double the rate at which it tapers its $120bn-a-month bond-buying programme, meaning it will now end in March rather than June. Policymakers also indicated that interest rates may need to rise three times next year if inflation proves persistent, having previously been evenly split on the prospects of a lift-off in rates next year. Jay Powell, Fed chair, struck an upbeat tone about the economy and positioned the US central bank for tighter policy, while a senior Fed official subsequently indicated that rates could rise as early as March 2022.

US producer prices increased 9.6% in the 12 months to the end of November, the biggest annual rise on records dating from 2010.

Europe

The FTSEurofirst 300 slid 0.3% over the week.

The Netherlands imposed a month-long lockdown while several other EU countries tightened restrictions to try to delay the Omicron wave.

The European Central Bank said it would scale back its pandemic-era bond purchasing programme by next March, although it will increase the rate of bond purchases in Q2 2022 under another scheme by €20bn to €40bn, before tapering it back to €20bn starting in October 2022. Officials also indicated they were unlikely to raise rates until at least 2023.

Norway’s central bank raised its benchmark interest rate to 0.5% and said more hikes were likely next year although that would depend on the impact of a surge in coronavirus infections and the emergence of the Omicron variant.

The IHS Markit flash eurozone composite purchasing managers’ index fell to a nine-month low of 53.4 in December, down from 55.4 the previous month; restrictions to tackle surging coronavirus infections hit the services sector, although there were signs of an easing in the supply bottlenecks holding back manufacturers. Input costs and selling prices rose less steeply than in November but they still increased at the second-fastest rates in the history of the survey.

Eurozone inflation rose to an annual rate of 4.9% in November.

In Germany, the composite index dropped to an 18-month low of 50 as services activity fell below the 50 level that separates expansion from contraction for the first time in eight months.

The Ifo Institute survey of German business sentiment fell more than most economists expected to 94.7 in December, down from 96.6 the previous month. Sentiment declined in the services, retail and construction sectors, including a steep drop in confidence among tourism and hospitality companies, but confidence rose among German manufacturers, although more of them also warned of worsening supply logjams.

Japan

The Nikkei 225 gained 0.4% over the week.

The Bank of Japan announced that it will taper its corporate debt and commercial paper purchases but will extend the loan scheme for smaller companies for six months to September. With other central banks unwinding emergency measures, the policy decision left the BoJ among the world’s most dovish central banks.

Pacific Basin ex Japan

Hong Kong and Chinese tech stocks fell after Washington moved to blacklist certain Chinese companies.

Chinese retail sales rose just 3.9% year on year in November, well below economists’ forecasts of 4.7%. A slight improvement in industrial activity, which grew 3.8%, was overshadowed by a drop in investment across the real estate industry.

Emerging markets

Mexico’s central bank raised rates 50 bps to 5.5% after annual inflation hit 7.37% in November, its highest level in 20 years.

Russia’s central bank raised rates by 100bps in its seventh straight increase which took the key rate to 8.5%.

Seven other EM central banks raised rates, including Chile, Colombia and Costa Rica.

In contrast, Turkey cut interest rates by 100bps to 14%, despite inflation running at more than 21%. President Erdogan also announced that the minimum wage would rise by 50% to help workers hit by soaring inflation. Trading in Turkish stocks was suspended on Friday after the sell-off in the lira spread to equities.

Bonds

The yield on the 10-year US Treasury bond closed the week down 6bps at 1.39%.

The yield on the 10-year German Bund closed the week at -0.38%, a drop of 3bps over the week.

Commodities

European and UK gas prices hit a new record high amid concerns over a potential Russian invasion of Ukraine which could disrupt stretched energy supplies this winter.

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Image by Gerd Altmann from Pixabay