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Investors wary despite upbeat economic news

Key takeaways

Over the past week, relatively upbeat economic data found itself in competition with worries about rising inflation and COVID-19.

  • In the euro area, the latest inflation data showed a 4.1% year-on-year surge, with energy costs accounting for the largest contribution to pricing pressures, adding around 2.2% to the annual increase. UK inflation also surged in October, with consumer prices rising by 4.2% in annual terms. The European Central Bank still expects price growth to slow during 2022, but has admitted it may take longer than initially expected. Meanwhile, the Bank of England has held rates steady since 2020, but is now expected to increase rates by the end of the year, further boosted by better-than-expected employment data.
  • Across the Atlantic, the latest data showed a 1.7% jump in US retail sales in October. Overall sales values were driven by higher inflation as well as early Christmas shopping activity. Broadly strong consumer activity has supported a range of economic activity indicators in recent months, with positive economic growth supported by ‘spill-over’ demand from a more muted 2020.
  • Nevertheless, there are some signs that the mood may be souring. The latest figures indicate that US consumer sentiment has fallen meaningfully, dropping to its lowest levels since 2011. Indicators like this – based on ‘soft’ data rather than hard evidence – can be quite choppy, and so far actual consumer activity has continued to hold up strongly. However, the significant drop in consumer sentiment over the last few months could be a sign that inflation fears are starting to weigh on consumer psychology. We are monitoring this closely.
  • Never far from the news headlines, the COVID-19 virus is creating new tensions in mainland Europe. A number of countries – including Ireland, Germany, and the Netherlands – have begun re-imposing firmer restrictions, from partial lockdowns to enforced working from home. It is worth reiterating that, at a global level, vaccinations have proven to be successful – hospitalisation rates are well below 2020 levels in countries with large-scale vaccine rollouts.
  • UK power prices reached their second highest peak on record last week, surpassing £2,000/MwH. A surge in intra-day energy pricing was primarily the result of low wind speeds early last week, leading to an energy shortfall from wind farms being made up for by more expensive gas- and coal-fired power plants. We believe that this highlights the need for growth in the infrastructure around renewable energy, such as battery storage, to support stability in the sector.

Weekly market moves

  • In a slightly risk-averse few days for financial markets, most major stock markets delivered negative or flat results over the week.

  • In keeping with this somewhat wary market mood, government bond prices rose slightly; bond yields, which move inversely to prices, fell incrementally.

  • The share prices of small to mid-sized companies in the US and UK underperformed over the week, but continue to lead the charge this year.

What to look out for this week

  • After some delays, we are likely to hear news of who will hold the position of Chair at the US central bank for the next four-year term. Jerome Powell – currently at the helm – is among the favourites.

  • Europe is already in the headlines thanks to new stricter COVID-19 measures, but Germany could gain further attention this week if a coalition deal is finally struck between three of its political parties, following September’s federal election.

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