Market commentary by eToro analyst for Romania, Bogdan Maioreanu
Inflation lost last night its “transitory” attribute according to the official statement of the Federal Open Market Committee (FOMC), the Fed body that sets U.S. interest rates. This means that inflation is here to stay at least until next year. Fed Chair Jerome Powell believes it will subside in 2022 and it will return to pre-pandemic levels in 2024. As a result, the Fed decided to double its bond purchase tapering in order to finish it by March next year and to factor three interest rate increases in 2022.
While the US is starting to curb its high inflation, in Europe the party continues, at least for the countries in the Eurozone. ECB is not yet intending to close the PEPP – Pandemic emergency purchase programme or to increase interest rates. But with inflation rates at 9.2% in Lithuania, 8.8% in Estonia, 7.8% in Romania and Poland, 7.4% in Hungary, 7.3% in Bulgaria and 6% in the Czech Republic, the Central Banks of countries that are not in the Eurozone have already started to raise interest rates. Some timid like 0.25% – the last month increase in Romania and 0.5% in Poland, others more aggressive like the increase with 1.25% in the Czech Republic.
Outside the EU, the champion of inflation in Europe is Turkey with 21.31% followed by Moldova with 12.44% Belarus and Ukraine with 10.3%. At world level the champion in inflation is Venezuela with a staggering 1575% followed by Sudan with 351% and Lebanon with 174%.
The inflation in the US reached 6.8% in November, the highest since June 1982. It was accompanied by a disappointing US Retail Sales report that came with an increase of only 0.3% in November compared with the 0.8% forecasted. This may show that American consumers are burdened by the steep increase in prices. There was a small decline in sales at auto dealers, which account for 20% of all retail sales. The Department stores have seen their sales decline sharply with 5.4% compared to the previous month and these were flat at internet retailers. This shows that the events like Black Friday and Cyber Monday might not have been very successful this year. Sales also slumped 4.6% at electronics stores and they declined at pharmacies. Sales increased 1% at bars and restaurants. Higher spending on food outside the home is generally viewed as a sign that consumers have confidence in the economy.
Aside from worries about inflation, Fed Chairman Jerome Powell said the economy has made enough progress to justify removing stimulus that the bank put in place early in the pandemic to prevent a major depression.
However, the spread of the Omicron variant was highlighted as a risk by the Fed despite initial assessment showing that this variant is highly transmissible but less severe and that existing vaccines and immunity from prior infection offer some protection against severe forms of the disease. Jerome Powell mentioned that the unknown is how it will affect the economy, “how much is suppressing demand as opposed suppressing supply. It is not clear how big the effects will be on inflation, on growth or hiring.” The Delta variant was slowing down hiring and it affected the recovery of the supply chains. But wave upon wave, people will learn to live with this pandemic, believes Powell. Moving forward the end of the taper is appropriate and Omicron doesn’t have much to do with it.”
The predicted series of hikes will raise rates to 2.5% (currently the rate is 0-0.25%). This means a smaller and slower series of increases than the average from the past, which raised rates by 3 pp. in a period of 15 months. Powell made very clear that the interest rate increases will not arrive before ending the tapering. It “wouldn’t be appropriate” to raise rates while still increasing asset purchases”. We’re basically two meetings away from finishing the taper”, Powell said.
Markets reacted positively to Powell remarks, with Nasdaq and S&P 500 climbing during the press conference. S&P Futures are climbing too.
Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.
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