Markets are awaiting US inflation data, due to be released today. Most participants expect to see price rises cooling, consolidating the slowdown seen in Europe and the US late last year.
A consensus forecast from Bloomberg predicts that US inflation will drop to its slowest pace since October 2021, with prices registering an annual increase of
6.5 per cent.
This leaves a knotty challenge for central banks – how to control inflation without triggering a huge recession.
Earlier this week the World Bank warned that the global economy is
“on a razor’s edge and could easily fall into recession if financial conditions tighten.” Its Global Economic Prospects report revised projections for growth in the world economy to 1.7 per cent this year, down from 2.9 per cent predicted in 2022.
The most significant threat to growth is central banks raising interest rates to tackle inflation, and keeping them high until it is under control.
All eyes will be on what the Fed does next. “The danger is that the US labour market continues to run hot and the Fed does not ease up,” writes international economy news editor Claire Jones.
She suggests policymakers consider threats beyond inflation. This would mean fewer rate increases, continued prices rises and inflation remaining above 2 per cent –
not ideal, writes Jones, but it could be the least worst option for everyone.
In the markets, bond investors are already pricing in reduced rates. “Rather than a sustained path of higher rates for 2023, they believe that recessionary pressures will lead to cuts later this year,” writes Mohamed El-Erian, president of Queens’ College, Cambridge.
But equity markets are expecting a softer landing, he notes, adding that
there needs to be better alignment between markets and policy signals.
The earth warms up
There was one area where the Fed was unequivocal this week: climate. In a speech on Tuesday, the bank’s chair Jay Powell said: “Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools
to promote a greener economy or to achieve other climate-based goals.”
Those comments came on the same day that the EU’s earth observation programme reported that
2022 was the fifth warmest year on record globally.
It was bad news for the US too. It has fallen further behind its Paris Agreement targets as initial estimates by environmental consultancy Rhodium Group found that last year
emissions increased by 1.3 per cent in the US.
International relations thaw
Amid the chaos of Covid,
foreign and economic policy in China is undergoing a reset.
China wants to improve diplomatic relations with some western countries, particularly Europe, which have been damaged by Beijing's support for Russia during the war in Ukraine. It also wants to boost growth in its slowing economy.
Closer to home, the UK and the EU enjoyed a breakthrough on Northern Ireland’s post-Brexit trading relations.
Following months of deadlock, a tentative solution is on the cards that would see
Brussels access the UK’s IT systems for trade across the Irish Sea. Though yesterday UK foreign secretary
James Cleverly tempered expectations.
“Having good mood music [with Brussels] is important . . . [but] on its own it’s not enough . . . there are still genuine differences and they can’t just be wished away,” he said.
The risk outlook
There was consternation among UK businesses as the
government cut its energy support scheme. While the package will be extended for another year, business groups have warned that the flat-rate discount will not provide enough protection if energy prices spike again.
Risk management was firmly in the BoE’s eyeline too. In a letter to UK bank leaders, officials shared their concern about how exposed
banks are to risks from other areas of the financial market. The bank said that “firms continue to unintentionally accrue large and concentrated exposures to single counterparties, without fully understanding the risks that could arise.”
Cyber security has also been in the news. The Guardian newspaper was subject to
a ransomware attack last month and has warned staff that personal data – including names, addresses, bank details, salaries and birthdays – were “accessed”.
Royal Mail was also unable to handle overseas mail yesterday
following a “cyber incident”.
In the US, investors have asked at least 10 companies — including American Express, Eli Lilly and HCA Healthcare — for
more information about the risks they face from abortion policies. This follows last year’s Supreme Court ruling which overturned Roe vs Wade.
Best of the rest
Meanwhile in the UK, figures show that
retail investors are making themselves heard. Some 210,000 shareholder votes were processed by fund supermarket Interactive Investor in 2022. That is up 30 per cent compared with the previous year.
BP and Shell’s AGMs were among the 10 most voted on in 2022, according to the data, as investors pushed the energy giants on net zero and emissions.
Meanwhile
Walt Disney named Mark Parker as its next chair. The move comes as the entertainment giant faces a possible proxy battle: activist investor Nelson Peltz wants a seat on the board and sources say he will go to investors after the company opposed him.
And finally European
financial services companies have made some progress towards gender diversity on boards. A report from EY found that, as of January, 42 per cent of board seats at firms are now held by women – up from 37 per cent when the research was first undertaken in June.
