Inflation… Inflation…

The US dollar reached a high of 1.1121 against the euro last Friday. The greenback is being buoyed by good economic figures and the prospect of a rate hike by the Fed. Gross domestic product growth rose by 6.9% on an annual basis in the fourth quarter of last year, well ahead of expectations of 5.5% and 2.3% in the previous quarter. Global GDP has increased by 5.7% over 2021, a jump not seen since 1984. Household spending increased by 3.3% in the fourth quarter after a 2% increase in the third. And lastly, on Thursday weekly jobless claims were 260,000, that is 30,000 less than the previous week. All in all, the United States’ very strong economic performance coupled with high inflation can only lead to expectations of rate hikes. And any case, Jerome Powell fulfilled expectations in his press conference following the monetary policy meeting last Wednesday. Mr Powell confirmed that inflation could be persistently above the 2% target and that supply chain disruptions were more problematic and persistent than anticipated. The US central bank intends to respond to these pressures by paring down its balance sheet and raising rates. Mr Powell did not rule out a tightening for monetary policy at each of the coming meetings, which means there could be four rate hikes this year starting on 16 March. Atlanta Fed President and voting member Raphael Bostic told the Financial Times that the Fed is also not ruling out a 50-point rate hike if inflation remains high. As a result, the prospect of US short-term rates rising above 1% by the end of the year is becoming a credible scenario. At least that is what the futures indicate, with the 30-day Fed Funds yield at 1.2150% in December.

This is still in contrast to the situation in the European Union. In the fourth quarter of last year, economic growth reached 0.3% in the eurozone and 0.4% in the European Union. On an annual basis, the increases are 4.6% and 4.8%. Among the Member States for which we already have Q4 data, Spain, Portugal and Sweden all grew by 2%, 1.6% and 1.4%, respectively, but Austria and Germany saw decreases of -2.2% and -0.7%, respectively. The market is waiting for tomorrow and the first meeting of the European Central Bank to hear what Christine Lagarde has to say. Ms Lagarde has to face 5% inflation and stated repeatedly last year that Frankfurt would not raise rates before 2023.

The situation in Ukraine remains tense even though Russia said on Friday that it wanted dialogue and not war by favouring the diplomatic route. Russian Foreign Minister Sergey Lavrov said that they did not want a war in Ukraine. These words at the end of last week eased some of the pressure on safe havens and reactivated risk appetite in the markets. The gold fell last week from $1,850.00 to $1,780.35 per ounce, the lowest for this year. The Swiss franc which had peaked at 1.0300 against the single currency last Monday fell back to 1.0440 this Monday. The pair has undoubtedly been nudged down along the way by the Swiss National Bank over the last few days. In any case, the SNB  has remained active in the foreign exchange market. In the last quarter of 2021, the it acquired USD 10 billion, EUR 18.47 billion and GBP 1.21 billion. For the year as a whole, the value of foreign currencies increased by more than CHF 56 billion, which shows the extent of the institution’s activity for the whole of 2021.

The Russian rouble, which had suffered greatly from these tensions and which had risen above 80 roubles to the dollar, also saw its situation ease a little and returned to below 77 roubles. But this market remains very volatile and sensitive to rumours of sanctions from the US.

Inflation has been in the news a lot lately. Two figures have been added to the list in recent days. There is fourteen: the number of years you have to go back to find it at such a level in Chile. And there is thirty: the same figure for New Zealand. Inflation in Chile reached 7.2% at the end of 2021, more than double its target of 3%. The central bank responded by raising its key rate from 0.50% to 5.5% from July 2021 to January 2022. New Zealand’s annual inflation rate soared in 2021 to a 30-year high of 5.9% on an annual basis. The RBNZ raised interest rates twice at the end of last year to 0.75%. A new hike is expected at its next meeting on 23 February.

The stock markets are not immune to this rising rate environment. The Federal Reserve’s talk of monetary tightening and geopolitical fears have weakened equities. US stocks have been the most sensitive to these events. Since the beginning of the year, the S&P is down by more than 4.6%, the Dow Jones by 2.5% and the Nasdaq by 8.3%. The decline was less marked in Europe, but the markets were also in the red, with the exception of London, which gained 2.5%, and Madrid, which has held steady.