The war in Ukraine has been going on for more than a month, and volatility in markets and commodity prices is high. Inflation estimates in the eurozone as well as the US employment report are a signal that inflation is becoming a problem
Rises in most stock indices over the past week while a sharp drop in world oil prices. Uncertainty about developments in the war between Russia and Ukraine has affected volatility in commodity markets and world financial markets. The S & P500 and NASDAQ indices ended the week with gains of 0.1% and 0.7% respectively. In Europe, stock indices in Germany, France and the UK recorded weekly gains of 1%, 2% and 0.7% respectively, and the Eurostox 50 index rose by In Asia, the CSI300 index in China rose by 3.6% this week, but has fallen by 13% since the beginning of the year. 8% in the price of a Brent barrel of oil to $ 104.4 a barrel, mainly as a result of the US President’s decision to open the country’s oil reserves and return to the market every day about a million barrels of oil for the next six months, but also due to the slowdown in demand in China. The re-eruption of the corona. China continues to pursue a policy of reducing contagion as much as possible, even at the cost of slowing economic activity.
A positive employment report in the US supports rapid Fed rate hikes. The number of employed in March rose by 431,000 jobs, slightly lower than the forecast for the number of new jobs which stood at 490,000. Thus, since the beginning of the year, the average monthly increase in new jobs has reached 562,000, a figure that indicates a significant improvement in the employment situation. The unemployment rate fell to 3.6% in March from 3.8% in February and the participation rate rose to 62.4%, the highest rate since March 2020. The average hourly wage rose 0.4% in the last month, similar to the forecast, and the annual rise in wages reached 5.6%. The vacancies stabilized at a high level of about 11.3 million jobs, a level that indicates an excess demand for workers which supports further wage increases.
U.S. economic activity is expanding, albeit at a slower pace. In February, household income rose by 0.5%, but spending rose by 0.2%. The rate of private savings from disposable income rose slightly to 6.3% from 6.1% in January. Savings rates in the United States and other developed countries, which rose sharply during the crisis, have fallen to pre-crisis levels in recent months. The decline in world savings rates has been one way for households to cope with the erosion in their purchasing power as a result of last year’s price increases. The ISM’s Purchasing Managers’ Index fell to 57.1 points in March, from 58.6 in February, but its level still indicates an expansion in activity. In the analysis of the components of the index, there was a slowdown in new orders and output, and a delay in the delivery dates of previous orders. However, there has been an increase in the employment component. The Conference Board’s Consumer Confidence Index was down 3.3 points from the original February figure, but since it was sharply downgraded, the March index indicated a slight increase. The relatively low level of the index was affected by consumers’ fears of the effects of inflation.
A reversal in the yield on US government bond yields. In the last week, the ten-year yield has dropped from 2.5% to 2.39%, while the two-year yield has risen from 2.37% to 2.47%. The change in yields is mainly due to the strengthening of estimates for sharp, half-percent interest rate hikes in the Fed’s upcoming meetings. Inflation expectations from the bond market have moderated in the past week. Five-year inflation expectations have fallen from 3.59% to 3.29% and ten-year expectations have fallen from 2.95% to 2.79% per year.
Eurozone: The inflation rate rose to 7.5% in the 12 months to March 2022. The first estimate of inflation in the eurozone indicated a further increase in the inflation environment, from an annual level of 5.9% in February to 7.5% in March. The rise in energy prices is the main cause of the acceleration of inflation in the eurozone, with these prices rising in March at an annual rate of about 45%. Excluding energy prices, the annual inflation rate in March reached 3.4%, and core inflation (excluding energy and food) has risen by 3.0% in the last 12 months. The unemployment rate fell to 6.8% in February, a low level compared to the past, but most economic confidence indices continued to fall in March. The Purchasing Managers’ Index for the manufacturing sector fell slightly in March, but still indicates an expansion at 56.5 points. The Central Bank of the Eurozone has reduced its growth forecast for 2022 to 3.7% in the baseline scenario. In a scenario where the negative effects of the war between Russia and Ukraine are intensifying, including the sanctions imposed on Russia, the growth forecast for 2022 is 1.2% lower and estimated at 2.5%.
As for natural gas imports from Russia, President Putin has demanded that payments be made in rubles starting in early April, but Germany, including the G7 countries, have rejected the new requirement, declaring that payments will continue, as in the past, in dollars or euros. It is still too early to determine whether the confrontation on this issue will lead to further disruptions in the supply of natural gas to the eurozone. In any case, an emergency plan for natural gas rationing has been prepared in Germany in the event that imports from Russia cease.
China: The return of the corona and fears of a crisis in the real estate industry raise expectations for the involvement of the government and the central bank. Surprising contraction in activity in March: The Purchasing Managers’ Index fell from 50.2 points in February to 49.5 points in March, and the Services Index fell from 51.6 points to 48.4 points. The quarterly report, released by the central bank, highlighted the rise in economic uncertainty and the need to consider broader monetary measures. Yes, it is possible to delete these companies from trading there.