Markets hit by US interest rate rise worries as IMF sees turbulence ahead – as it happened

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Tech stocks continue to slide as investors brace for US Federal Reserve to tighten monetary policy due to high inflation.

Full story: Global financial markets hit by potential US interest rate rise concerns

18:51 Richard Partington


Traders on the floor of the New York Stock Exchange today. Photograph: Brendan McDermid/Reuters


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Traders on the floor of the New York Stock Exchange today. Photograph: Brendan McDermid/Reuters

Global financial markets tumbled on Monday amid growing investor concerns about the US Federal Reserve potentially putting up interest rates in response to surging inflationary pressures.

Share prices fell back on both sides of the Atlantic with the FTSE 100 shedding 40 points, or 0.5%, in London, to finish the day at 7,445, while stocks fell by a more substantial margin on Wall Street as traders bet on the American central bank leaping into action from as early as March to tackle high inflation rates.

On a day of selling pressure around the world, the Nasdaq index slumped into correction territory, defined by financial investors as a drop of more than 10% from a previous peak, amid a sell-off in US tech stocks from an all-time high reached in November.

Housebuilders were among the biggest fallers in London after the UK government announced a £4bn package forcing developers to help remove dangerous cladding from buildings in the wake of the Grenfell Tower disaster in June 2017.

Shares in Persimmon and Barratt fell by about 5%, while Taylor Wimpey and Berkeley dropped 3.5%.

The gyrations come as financial markets worldwide adjust to the prospect of central banks ramping up interest rates in response to soaring cost of living, despite weaker levels of economic growth at the outset of 2022 after the emergence of the Omicron variant of Covid-19.

The Dow Jones Industrial Average fell by 1.5% on Monday afternoon in New York, while markets in France and Germany finished the day down more than 1% amid heightened investor caution worldwide.

US government bond yields hit a two-year high as investors bet the Fed could raise rates from as early as March, in a jittery trading session ahead of official US inflation data due on Wednesday. US inflation surged to 6.8% in November, the highest level since 1982.

Related: Global financial markets hit by potential US interest rate rise concerns

European close

Europe’s stock markets have just closed, with losses on the main bourses.

January continues to be a choppy time for the markets, with the pan-European Stoxx 600 losing nearly 1.5% today. It’s now down 1.8% so far this year.

Michael Hewson of CMC Markets explains:

It’s been a broadly weaker session for European shares today, as we start a new week with higher yields and inflation worries continuing to temper appetite for risk. The prospect of a faster pace of US rate rises has continued to keep markets on edge, with losses accelerating as US markets reopened after the weekend.

While the Nasdaq 100 has plunged to its lowest levels in 10 weeks, the FTSE100 appears to be holding up a little better than its peers, helped by outperformance in financials, as well as consumer staples.

 

After a choppy morning on Wall Street, the main indices are still in the red.

Both the Dow Jones industrial average and the wider S&P 500 are down over 1%, in a fairly broad selloff.

Consumer discretionary stocks are the worst-performing sector, followed by materials producers, industrial stocks and technology companies.

The Nasdaq Composite has recovered a little, but is still down 1.5% today – and over 6% so far this year.

Danni Hewson, AJ Bell financial analyst, says investors seem to have finally priced in the prospect of US rate rises, after months of rising inflation and increasingly hawkish noises from the Federal Reserve.

The fallers present as a who’s who of tech sector darlings with Amazon, Tesla, Etsy and Peloton among those taking a hit. But it’s not just tech that’s bearing the brunt of today’s rout, investors are beginning to think of “growth” as a negative, realisation setting in that those money makers of the past few years will be weighed down by added baggage.

“Taper tantrum, manic Monday, whatever label you want to put on today’s carnage the real story will be played out over the rest of the week. Are investors just having a quick panic that will be followed by a deep breath and a spot of bargain hunting or are investors really rattled by what the next twelve months are set to bring? Rate rise rhetoric tends to lead to knee jerk reaction followed by a period of reflection, but with more inflation data hurtling towards us, this week could be unsettling at best.

 

Worries about the impact of a rise in interest rates on the value of future earnings are threatening to turn into a painful reckoning for many tech investors, says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown:

The Nasdaq composite index slipped by as much as 4% in early trade, before stemming some losses and is down by around 10% from its November high. Apple retreated further away from the nascent 3 trillion dollar club, falling 2%.

Chip maker Nvidia and Mastercard registered falls of more than 5% before recovering slightly. Amazon joined the downward trajectory, slipping by 3.6% in early trade.

On the FTSE 100, Scottish Mortgage Investment Trust, which holds a raft of tech darlings like Tesla, Nio and Amazon was among the biggest fallers amid concerns the tech juggernaut is slowing. With other companies in the big data and payments space slipping back, information analytics firm Experian fell lower, ending the day down by more than 5% .

 

The question facing investors today is whether to sell long term winners to buy into the short-term recovery bounce, says David Miller, executive director of Quilter Cheviot Investment Management.

In his latest Diary of a fund manager, Miller explains that the answer depends on an investor’s perspective, and their optimism about a return to the pre-covid days.

(Some will be sticking with ‘growth’ stocks for their long-term potential, while others will be shifting into ‘value’ companies who suffered during the pandemic)

Setting aside the short-term noise, Miller adds, the major assumptions of this year are that;

  • The global economy will continue to grow, not quite as fast as last year which was the best for 40 years, but still above average.
  • The US Federal Reserve will increase interest rates three times during the year, but only by fractions. If economic growth falters, it will back away from being tough.
  • Geopolitical hotspots will continue to be more bluff than action.
  • Covid will remain a problem, but not worse.

FTSE 100 ends lower

Britain’s blue-chip stock index, the FTSE 100, has closed 40 points lower at 7,445 points.

That’s the FTSE 100’s lowest close in 2022, as it hands back some of last week’s gains.

Steam engineering group Spirax-Sarco (-6.5%), industrial equipment rental firm Ashtead (-5.9%) and consumer credit report firm Experian (-5.4%) were the top fallers.

Housebuilders also slid, with Persimmon down 5.1% as the government insists that the industry will bear the cost of the UK’s cladding crisis.

Related: Cladding: ‘We are coming for you,’ Michael Gove warns builders of flats in fire-risk dispute – UK politics live

 

Here’s Fawad Razaqzada, analyst at ThinkMarkets, on today’s drop in technology stocks and cryptocurrencies:

Investors are wondering what 2022 means for assets inflated with government and central bank liquidity during the pandemic, with technology and cryptocurrencies being the obvious focal points.

So far, they have shown a clear desire to move into value and away from low-div-yielding stocks, as bond yields climb across the board as we get closer to the time of lift off. Investors are pricing in a Fed hike in as early as March.

Gold’s struggles are a side effect of investors’ desire for higher yielding assets and the US dollar. The precious metal has been unable to find much haven flow despite the crypto and tech sell-off.

 

Megatech stocks are under pressure today.

Apple is down 2% today, Alphabet (Google) and Microsoft have both lost 2.6%, while Meta (Facebook) has tumbled 4.4%. Tesla is 3% lower, Amazon has dropped 3.3%, while graphics chip-maker Nvidia has slid over 5.5%.

 

The markets are throwing a tantrum about the prospect of higher US interest rates, says Callie Cox, investment analyst at eToro:

 

Ouch. The technology-focused Nasdaq Composite is now in correction territory.

The index has dropped by more than 10% from its record high in November, as Wall Street has priced in higher US interest rates.

 

European markets have dropped deeper into the red too, as the risk-off mood hits equities.

In London, the FTSE 100 index is now down 45 points or 0.6% at 7440, retreating from last week’s 22-month highs.

Steam engineering group Spirax-Sarco are the top faller (-6%), followed by tech investor Scottish Mortgage Investment Trust, which is suffering from the technology selloff in New York.

The pan-European Stoxx 600 index is now down 1.3%.

 

The Nasdaq Composite index has hit its lowest level since mid-October.

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Wall Street’s selloff is gathering pace, with the Nasdaq Composite now down over 2%.

Worries about a possible rise in US interest rates, and anxiety over the impact of the pandemic, are both hitting shares today, says Bloomberg:

Technology companies led stock losses in another leg down for pricey growth shares under threat from rising rates and inflation. Some corporate warnings about the negative impacts of the omicron coronavirus variant also soured sentiment.

The Nasdaq 100 dropped about 2%, while Treasury 10-year yields climbed to 1.8%. Lululemon Athletica Inc. tumbled as the maker of yoga pants said omicron was constraining its operations, while Torrid Holdings Inc. plunged after the plus-size women’s clothing retailer cut its sales forecast as the variant caused disruptions to its workforce.

Bitcoin fell for the fifth time in six sessions, putting it on pace for the worst start to a year since the earliest days of the digital alternative to money.

Markets are facing higher volatility as the pandemic liquidity that helped drive equities to record highs is withdrawn. The Federal Reserve will likely raise interest rates four times this year and will start its balance-sheet runoff process in July, if not earlier, according to Goldman Sachs Group Inc. [see earlier post].

A key measure of U.S. inflation — set to be released Wednesday — is anticipated to have increased further in December.

Wall Street drops 1% amid rate rise jitters



The floor of the New York Stock Exchange. Photograph: Spencer Platt/Getty Images


© Provided by The Guardian
The floor of the New York Stock Exchange. Photograph: Spencer Platt/Getty Images

Stocks have opened lower in New York as the prospect of several US interest rate hikes this year worries investors.

The S&P 500 index of US stocks has fallen 1%, shedding 47 points to 4,630 points, extending weak start to the year.

Technology stocks are under pressure, dragging the Nasdaq Composite index down by 1.75% in early trading.

Tech firms tend to fall out of favour in an environment of higher interest rates and inflation, with investors favouring companies making higher profits today, rather than those which could deliver higher earnings in future years.

The Dow Jones industrial average of 30 large US firms has dipped by 0.6%, with bank stocks rising (higher interest rates help their profit margins).

 

Wall Street is bracing for US inflation to potentially hit 7% on Wednesday, up from the 38-year high of 6.8% recorded for November.

Mohamed El-Erian, chief economic adviser at Allianz, has predicted we could see a ‘7-handle’ on US CPI:

Fiona Cincotta, senior financial markets analyst at City Index, says another inflation increase could lead to a US interest rate rise in March:

US stocks are set to open lower as investors fret over rising inflation and the Fed hiking interest rates at the same time that Omicron cases are surging higher.

US treasury yields rose to a fresh 2 year high amid growing expectations that the Fed will tackle surging inflation head on this year raising rates at a faster pace than initially expected.

Tech stocks, which are particularly sensitive to higher interest rate expectations are once again under performing as investors rotate out of high growth stocks into value, with bank stocks rising on the prospect of a rate hike boosting net interest income.

Whilst there is no high impacting US data due for release today attention is firmly on US inflation data and a speech by Fed chair Powell later in the week. Inflation is expected to come in at 7%, which could prompt more hawkish commentary from the Fed, cementing the way to a rate hike potentially as soon as March.

 

Wall Street is set to open lower, as worries about potential US interest rate rises hit growth stocks.

Nasdaq futures are down 1%, as technology stocks are hurt by expectations of a high interest rate environment.

Bank stocks, though, are benefitting from rate hike bets, with US. Treasury yields (the interest rate on US government debt) trading at two-year highs.

Full story: US interest rate rise could hit vulnerable countries, IMF warns

13:56 Larry Elliott

Higher US inflation could lead to a tougher than expected response from America’s central bank that would send tremors through financial markets and put vulnerable countries at risk, the International Monetary Fund has warned.

Adding to growing concerns about the sharp increase in price pressures being registered across the globe, the IMF said emerging market nations should brace themselves for muscular action from the US central bank, the Federal Reserve.

“For most of last year, investors priced in a temporary rise in inflation in the US given the unsteady economic recovery and a slow unravelling of supply bottlenecks,” the Washington-based IMF said in a blogpost.

“Now sentiment has shifted. Prices are rising at the fastest pace in almost four decades and the tight labour market has started to feed into wage increases. The new Omicron variant has raised additional concerns of supply-side pressures on inflation.

The Federal Reserve referred to inflation developments as a key factor in its decision last month to accelerate the tapering of asset purchases.”

More here:

Related: US interest rate rise could hit vulnerable countries, IMF warns

 

13:27 Rob Davies


Detail of the new coachbuilt Rolls-Royce Boat Tail


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Detail of the new coachbuilt Rolls-Royce Boat Tail

Covid-19 spurred wealthy motorists to buy more Rolls-Royces than ever before because it made them realise life is short, the luxury carmaker has said.

As global cases escalated in 2021, Rolls-Royce Motor Cars, based in Goodwood, West Sussex, booked the highest annual sales in its 117-year history, selling 5,586 vehicles.

The company’s chief executive, Torsten Müller-Ötvös, said the pandemic had led to customers, whose average age was 43, responding to the reminder of their own mortality by splashing out on luxury cars.

“Many people witnessed people in their community dying from Covid and that made them think life can be short and you’d better live now rather than postpone until a later date,” said Müller-Ötvös. That has helped Rolls-Royce.”

He said the carmaker, owned by BMW, had also benefited from the restrictions the pandemic had placed on wealthy consumers’ opportunities to spend their money elsewhere.

“It is very much due to Covid that the entire luxury business is booming worldwide.

People couldn’t travel a lot, they couldn’t invest a lot into luxury services … and there is quite a lot of money accumulated that is spent on luxury goods.”

Related: Rolls-Royce: Covid has spurred record sales of our cars

Take-Two acquiring Zynga in $12.7bn deal

Big takeover news in the games sector: Grand Theft Auto maker Take-Two is acquiring mobile gaming firm Zynga, the creator of FarmVille.

Take-Two has agreed to buy all the outstanding shares of Zynga in a $12.7bn deal, which values Zynga at 64% above its closing price last Friday.

The deal will establish Take-Two as “one of the largest and most diversified mobile game publishers in the industry”, bringing together its portfolio of console and PC games with Zynga’s mobile-based titles.

A statement announcing the deal explains:

Both companies have created and expanded iconic franchises, which will combine to form one of the largest and most diverse portfolios of intellectual properties in the sector.

Take-Two’s labels are home to some of the most beloved series in the world, including Grand Theft Auto®, Red Dead Redemption®, Midnight Club®, NBA 2K®, BioShock®, Borderlands®, Civilization®, Mafia®, and Kerbal Space Program®, while Zynga’s portfolio includes renowned titles, such as CSR Racing™, Empires & Puzzles™, FarmVille™, Golf Rival™, Hair Challenge™, Harry Potter: Puzzles & Spells™, High Heels! ™, Merge Dragons!™, Toon Blast™, Toy Blast™, Words With Friends™, and Zynga Poker™

Take-Two will pay $9.86 per Zynga share – $3.50 in cash and $6.36 in shares of Take-Two common stock, implying an enterprise value of $12.7bn.

Shares in Zynga have surged by over 50% in premarket trading, from $6 to $9.12.

 

Goldman Sachs analysts have predicted that the Federal Reserve will likely raise US interest rates four times this year, due to steep inflation and the recovery in the jobs market.

They also anticipate the Fed will start its balance sheet runoff process in July, if not earlier as Bloomberg explains:

Rapid progress in the U.S. labor market and hawkish signals in minutes from the Dec. 14-15 Federal Open Market Committee suggest faster normalization, Goldman’s Jan Hatzius said in a research note.

“We are therefore pulling forward our runoff forecast from December to July, with risks tilted to the even earlier side,” Hatzius said.

“With inflation probably still far above target at that point, we no longer think that the start to runoff will substitute for a quarterly rate hike. We continue to see hikes in March, June, and September, and have now added a hike in December.”

MPs push for swift conclusion on Woodford inquiry

MPs have called on the City watchdog to wrap up their investigation into the collapse of fund manager Neil Woodford’s flagship fund swiftly, so any appropriate action can be taken.

The Treasury Committee has urged the Financial Conduct Authority (FCA) to draw its investigation into the failure of the Woodford Equity Income Fund to a conclusion as quickly as possible.

The fund folded in 2019, leaving hundreds of thousands of investors nursing losses.

Related: Neil Woodford to close down investment funds

Related: Neil Woodford funds: when will investors get their money back?

Treasury committee chair Mel Stride says:

“The collapse of the Woodford Fund led to significant losses for many retail investors.

The FCA’s investigation is set to move into a new phase, and I have today written to the FCA to urge them to allocate the resources required to enable as swift a conclusion to their investigation as possible.”

The committee has also published a letter they received in mid-December by FCA chief executive Nikhil Rathi. Rathi explains that the watchdog was finalising its legal analysis, “with a view to making decisions as to whether to take action and, if so, what action should be taken and against whom.”

In a letter replying to Rathi today, Stride says the Woodford situation remains “a matter of keen interest to the Committee”, and urges the FCA to ensure the inquiry has the resources it needs.

I expect the FCA to ensure that this investigation and any regulatory action which follows is resourced to ensure as swift as possible a conclusion, and that the FCA will take every opportunity (within the confines of the law) to update the Committee as the investigation progresses.

 

Back in the City, housebuilders are still under pressure as the government laid out plans to make developers help cover the cost of the UK’s cladding crisis.

Related: Leaseholders will not have to pay to fix any fire risks, vows Gove

Persimmon (-4.9%) is still the top FTSE 100 faller, as investors digest the situation, as Newsnight’s Ben Chu tweets:

 

Despite nearing a record low in November, eurozone unemployment (7.2%) is still higher than in the UK (4.2%) and the US (3.9%).

The Financial Times points out there are few signs that wage increases for European workers are as large as those for their American counterparts, adding:

The recent rebound in the eurozone economy is expected to slow because of restrictions to contain the Omicron variant.

But Jack Allen-Reynolds, senior Europe economist at Capital Economists, said: “If we are right that activity will start to pick up again in February and March, any impact on the pace of hiring should be shortlived.”

Eurozone unemployment near record low

Eurozone unemployment has now almost closed the gap with its best pre-pandemic reading after dropping in November, says Bert Colijn, senior eurozone economist at ING.

This strong performance is thanks to furlough scheme support and rapid demand recovery. The low unemployment rate opens the door further for sustained higher medium-term inflation.

Unemployment continued its rapid decline in November as it fell from 7.3 to 7.2%. Despite restrictions still in place and slowing GDP growth, the labour market continues to boom. All large economies saw declining rates in November, with the most notable drop coming from Spain where unemployment fell from 14.4 to 14.1%. The Netherlands at 2.7 and Germany at 3.2% are among the strongest labour markets in the eurozone at the moment.

Colijn is also hopeful that unemployment won’t spike once job protection schemes wrap up, given demand for workers remains strong.

With furlough schemes still supporting – part of – the job market, there remains some concern about what will happen when this support ends.

We’re not too worried about this anymore as labour demand seems so strong at the moment and take-up of the schemes has already declined dramatically over the course of the pandemic.

Eurozone unemployment drops: reaction

Jonas Keck, economist at the CEBR thinktank, says eurozone labour market showed continued improvement in November, with the headline rate of unemployment falling to 7.2%:

Due to an environment of general economic uncertainty, Cebr has recently revised its forecast of eurozone GDP growth downwards. GDP in the eurozone is expected to grow by 4.1% over the course of 2022.

This slowdown in growth and a potential return of stricter public health measures are, however, not expected to lead to a long-term deterioration in the labour market, as most European countries have been successful in shifting the burden of the pandemic from the labour market to public finances.

Despite some near-term headwinds, the general outlook for the eurozone’s labour market is positive.” –

Claus Vistesen, macroeconomist for Pantheon Macroeconomics, predicts that eurozone unemployment will keep falling this year.

Wages, though, don’t appear to be rising sharply in response, points out Oxford Economics’ Oliver Rakau.

But price pressures are building, with eurozone inflation hitting 5% last month, the highest since the euro was created.

 

The pound has climbed to its strongest level against the euro since the start of the pandemic.

Sterling hit €1.1995 this morning, the highest since February 2020, despite this morning’s encouraging fall in eurozone unemployment.

The pound has rallied in the last month, lifted by optimism that omicron will not derail the economic recovery despite the hit to hospitality in the run-up to Christmas.

It means one euro is worth 83.33p, as this chart from interactive investor’s Victoria Scholar shows.

Eurozone jobless rate improves

Unemployment across the eurozone has fallen again, as the region battles back from the economic shock of the pandemic.

The euro area jobless rate fell to 7.2% in November, data firm Eurostat reports, down from 7.3% in October and close to its pre-pandemic levels.

A year earlier, it was 8.1%, before vaccine rollouts helped the European economy to reopen.

During November, the number of people unemployed fell by 222,000 in the eurozone, and by 247 000 in the wider European Union and by 222 000 in the euro area.

But that still leaves 11.8m unemployed people in the eurozone, and nearly 14m in the EU.

The spread of Omicron, and the introduction of lockdown measures in some European countries late last month, may have slowed the jobs recovery.

 

In the City, shares in UK housebuilders have dropped after the government ordered the industry to pay £4bn to help remove dangerous cladding from buildings.

In a letter to property developers this morning, secretary of state for levelling up, housing and communities Michael Gove said they must help foot the bill, following the Grenfell Tower disaster in 2017.

“It is neither fair nor decent that innocent leaseholders, many of whom have worked hard and made sacrifices to get a foot on the housing ladder, should be landed with bills they cannot afford to fix problems they did not cause,”

Gove is unveiling the £4bn package today to help leaseholders escape the onerous costs involved in replacing combustible cladding. Those who live in blocks between 11m and 18m tall will no longer face crippling bills, which had run into tens of thousands of pounds.

Speaking on the BBC Today programme (after being freed from the Broadcasting House lift), Gove explains that the big housebuilders have all been making significant profits, so need to make a fair contribution to the cost of replacing Grenfell-style cladding.

Housebuilders are leading the FTSE 100 fallers, with Persimmon (-3.6%), Barratt Development (-3.2%), Taylor Wimpey (-3%) Berkeley Group (-2.8%) all weaker.

The government expects that all developers responsible for affected buildings with annual profits from housebuilding of at least £10m will be in the frame for paying up under the new plan.

Gove is giving developers until March to come up with a fully funded plan for resolving the cladding crisis. Otherwise, ministers could restrict access to government funds and future procurement if they fail to act, or legislate to force them to pay up.

Housebuilders had already set aside funds for cladding issues, and already face a levy on profits to address the problem. The industry argues that other organisations are also involved in the construction of affected buildings, including housing associations, local authorities, and the manufacturers who produced materials that weren’t fit for purpose.

Campaigners have warned that leaseholders face other serious fire-safety problems, and massive costs to fix. That includes defective fire doors, flammable balconies and missing firebreaks because of non-compliant building works. Here’s the full story.

Related: Gove must spend ‘billions more’ to end building fire safety crisis

Brexit changes will add to soaring costs in 2022, warn UK manufacturers

09:43 Richard Partington

Manufacturers have warned that Brexit will add to soaring costs facing British industry, amid concerns that customs delays and red tape will rank among the biggest challenges for firms this year.

Make UK, the industry body representing 20,000 manufacturing firms of all sizes from across the country, said that while optimism among its members had grown, it was being undermined by the after-effects of the UK’s departure from the EU.

One year on from the end of the transition period, two-thirds of industrial company leaders in its survey of 228 firms said Brexit had moderately or significantly hampered their business.

More than half of firms warned they were likely to suffer further damage this year from customs delays due to import checks and changes to product labelling.

According to the 2022 MakeUK/PwC senior executive survey, Brexit disruption remains among the biggest concerns facing industry bosses for the year ahead as Britain’s departure from the EU complicates the fallout from Covid-19 and the rising costs facing companies.

Delays at customs, the additional costs from meeting separate regulatory regimes in the UK and the EU, and reduced access to migrant workers were among top concerns raised in the survey.

The report says:

“It is clear from these figures that Brexit and the global Covid-19 pandemic have had a scarring effect on the mentality of many businesses, which are traumatised by the ongoing delays and disruptions to their supply chains.”

Related: Brexit changes will add to soaring costs in 2022, warn UK manufacturers

 

Shares in travel and hospitality firms have risen this morning, on hopes that the pandemic may be easing.

British Airways parent company IAG (+2.4%), conference organiser Informa (+1.4%), budget airline easyJet (+3.7%) and Wizz Air (+2.9%), cinema operator Cineworld (+6.5%) are among the risers in London.

This follows signs that omicron is less severe than the Delta variant of Covid-19, following record numbers of cases in the UK in recent weeks.

Related: Omicron could be ‘first ray of light’ towards living with Covid

Luca Paolini, chief strategist at Pictet Asset Management the economic recovery remains resilient despite the restrictions introduced to combat Omicron.

The global recovery remains resilient, thanks to a strong labour market, pent-up demand for services and healthy corporate balance sheets.”

Given our positive outlook for the economy, we are looking for opportunities to raise our weighting in stocks in 2022.”

The global economy is on track to grow 4.8 per cent in 2022 with the US experiencing a strong recovery in both manufacturing and services.”

That could mean US interest rates rise this year, potentially creating turbulence in emerging economies and some volatility in the financial markets.

Paolini explains:

Price pressures are more persistent than expected, however. Inflation is still running way above the central bank’s official target. We expect core inflation to peak in early 2022, which should prompt the US Federal Reserve to raise interest rates by as early as June 2022.”

 

Here’s AJ Bell investment director Russ Mould on this morning’s early market action.

“Despite some tentative positivity in Asian trading, the UK index was not helped by a weak start for the housebuilding sector.

“The UK Government is reportedly looking for property developers to take on a greater share of the costs of repairing dangerous apartment blocks in the wake of the Grenfell tragedy in 2017.

“Many flat owners have been left with onerous costs for replacing flammable cladding and the latest reports on who will foot the bill should come as no surprise to the sector in that context.

“The housebuilders have benefited from generous incentives, such as Help to Buy and the mortgage guarantee scheme, in recent years. However, state support is not a one-way street and the sector needs to do its bit to look after its customers.

“With a quiet start to the week for big corporate and economic announcements, markets could remain in a holding pattern until Wednesday when US inflation figures will reveal just how acute inflationary pressures are in the world’s largest economy.”

Aldi reports ‘best ever’ Christmas amid strong demand for beer, wine and spirits

09:18 Rob Davies


An Aldi store in Milton Keynes Photograph: Andrew Boyers/Reuters


© Provided by The Guardian
An Aldi store in Milton Keynes Photograph: Andrew Boyers/Reuters

German discount supermarket chain Aldi has announced its “best ever” Christmas, and predicted it would prosper as households tighten their belts.

My colleague Rob Davies explains:

Sales at Aldi were up 0.4% in December 2021 compared with the equivalent month in 2020, despite a boost that year from people ordering more groceries amid a lockdown that forced hospitality venues to close.

Kicking off the Christmas updates for supermarkets, Aldi claimed figures from the research firm Kantar showed it was the “only major supermarket” to increase its sales in December.

Its sales growth over the month was partly driven by record sales of its premium range and strong demand for beer, wine and spirits.

Its chief executive said the discounter stood to benefit even further if people opted for cheaper shopping lists this year, as a cost-of-living crisis looms due to soaring energy bills and higher taxes.

Here’s the full story:

Related: Aldi reports ‘best ever’ Christmas amid strong demand for beer, wine and spirits

 

09:11 Phillip Inman

Another important housing story…Britain faces a crisis in the wake of the pandemic as confusion about planning rules and shortages of staff undermine government targets to build 300,000 homes a year.

A retreat from housebuilding by smaller companies must be tackled by ministers to reduce the shortage of homes, according to a House of Lords committee.

A report, titled Meeting Housing Demand, warned:

“Too many people currently live in expensive, unsuitable and poor-quality homes, and housing supply needs to be increased now to tackle the housing crisis.

Here’s the full story:

Related: Sort out housebuilding obstacles or miss target, Lords warn UK government

Introduction: IMF says emerging economies must prepare for Fed policy tightening



America’s Federal Reserve could send turbulence through the markets if it tightens monetary policy this year Photograph: Joshua Roberts/Reuters


© Provided by The Guardian
America’s Federal Reserve could send turbulence through the markets if it tightens monetary policy this year Photograph: Joshua Roberts/Reuters

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Turbulence could be approaching as the US central bank prepares to wind back its massive stimulus programme, and emerging economies would be in the front line.

The International Monetary Fund has warned this morning that emerging markets could suffer painful spillovers once the US Federal Reserve starts to tighten monetary policy. With US inflation hitting near 40-year highs, US interest rates could rise soon.

Those spillovers could include capital surging out of emerging markets, dragging down their currencies. That would be particularly serious for countries with large debts or high inflation.

The IMF explains in a new blogpost this morning:

Broad-based US wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation. Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally.

These developments could come with a slowing of US demand and trade and may lead to capital outflows and currency depreciation in emerging markets.



IMF report showing how tighter US monetary policy affects emerging markets


© Provided by The Guardian
IMF report showing how tighter US monetary policy affects emerging markets

The Fed is on track to end its asset-purchase programme in March, and expects to raise interest rates three times this year.

The minutes of its December meeting show that it could start to cut its balance sheet, known as quantitative tightening (QT), soon too — news that rattled the markets last week.

Such tightening could have more severe implications for vulnerable countries, the IMF adds:

In recent months, emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the US dollar.

The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies.

So, with the Fed sounding hawkish, and omicron hitting supply chains and pushing up costs, emerging market policymakers need to prepare for a storm.

Several emerging economies, such as Brazil, Russia, and South Africa, raised their interest rates in 2021, due to high inflation.

But more action may be needed. Those with high debts denominated in foreign currencies should look to reduce, or hedge, that exposure, while those with high debts may need to cut spending or lift taxes faster, the IMF says.

Such ‘fiscal tightening’ would weigh on growth and employment, of course, which highlights the dilemma facing emerging market politicians and central bankers.

Worryingly, the IMF also warns that there could be bank failures in some weaker countries, saying:

For countries where corporate debt and bad loans were high even before the pandemic, some weaker banks and nonbank lenders may face solvency concerns if financing becomes difficult. Resolution regimes should be readied.

The ongoing Covid-19 pandemic also threatens emerging markets — many of whom have not benefitted from the mass vaccination rollouts seen in advanced economies.

Related: A new Covid variant is no surprise when rich countries are hoarding vaccines | Gordon Brown

The IMF concludes:

While the global recovery is projected to continue this year and next, risks to growth remain elevated by the stubbornly resurgent pandemic.

Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for potential bouts of economic turbulence.

The agenda

  • 10am GMT: Eurozone unemployment figures for November
  • 3pm GMT: US wholesale inventories for November

 

European stock markets have started the week in the red.

The FTSE 100 index has dipped by 10 points, or 0.12%, while Germany’s DAX and France’s CAC are both 0.5% lower.

Jitters about the prospect of higher US interest rates continue to weigh on markets, as Victoria Scholar, head of investment at interactive investor, explains:

“Choppiness continues this week with European markets initially opening in the green before shifting into the red. Oil & gas is outperforming while household goods are under pressure. There’s no shortage of risk events for the week ahead including US inflation data, earnings from the US financial giants and comments from Fed Chair Jay Powell.

After opening flat, the FTSE 100 is giving back almost 0.5% with the next major support level at 7,450. The DAX and the CAC have swung from gains to losses this morning with a nervous overhang after last week’s volatility capping any notable gains.”

 

The prospect of America raising interest rates, and unwinding its bond purchase stimulus programme, is weighing on global markets – so the IMF’s blogpost is well-timed.

Shares, and other riskier assets such as bitcoin, fell last week, as investors anticipated that the Federal Reserve could unwind its balance sheet sooner and faster than expected.

Sovereign bond prices have also fallen, driving up the interest rates on government debt, as traders anticipate the Fed lifting rates and reducing its holdings of US Treasuries during 2022.

Jim Reid of Deutsche Bank says it’s been a dramatic start to the year:

To be fair the Fed were starting to catch up with reality late last year but Omicron meant that the market was reluctant to read their more hawkish move as entirely realistic given the risks that the variant presented.

However the holiday season provided more evidence that Omicron was notably milder, especially amongst the vaccinated, and the result has been that the market has looked through this more than they were willing to before Xmas whilst at the same time the Fed have become even more hawkish by upping the ante on QT. So a perfect storm.

Source: Thanks msn.com