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Weekly update
  • Weekly update
  • 5 minute read

A good week for

  • Oil surged higher again, gaining c. 5% in US dollar terms
  • Emerging markets rallied in sterling terms

A bad week for

  • Developed non-UK equities broadly weakened
  • US government bonds softened further

UK economy

UK GDP surged 0.9% in the month of November, a huge improvement on the 0.2% rise seen in October. The services sector drove the bulk of growth, advancing 0.7%. Professional services were strong, while a resilient retail environment boosted demand for transport and storage sectors. Industry and construction, smaller shares of the economy, grew 1% and 3.5% respectively. Activity likely weakened in December and January as the Omicron variant spread, requiring some social restrictions and hurting health confidence. However, with cases looking to have peaked and hospitalisations still low, measures may be withdrawn soon. The impact on the economy is thus likely to be smaller than the hit to growth seen at the start of 2021.

China economy

Last week saw the publication of several key indicators of China’s economic health. Chinese credit data showed that total social financing was 2.37trn yuan, in line with market expectations. In annual growth terms, broad credit growth accelerated to 10.3% in December, a time when credit growth tends to be weaker. However, almost half of December’s issuance was government bonds, with corporate funding actually much weaker than pre-pandemic levels. This suggests that Beijing needs to do more to ease credit conditions for Chinese corporates. Trade data was also released, with export volumes likely increased by c. 9% in December. However, import volumes likely fell 2.1%. Export demand may weaken in 2022, if economies can relax social restrictions and consumers switch spending towards social consumption and away from goods.

US inflation

Last week saw the publication of several key indicators of China’s economic health. Chinese credit data showed that total social financing was 2.37trn yuan, in line with market expectations. In annual growth terms, broad credit growth accelerated to 10.3% in December, a time when credit growth tends to be weaker. However, almost half of December’s issuance was government bonds, with corporate funding actually much weaker than pre-pandemic levels. This suggests that Beijing needs to do more to ease credit conditions for Chinese corporates. Trade data was also released, with export volumes likely increased by c. 9% in December. However, import volumes likely fell 2.1%. Export demand may weaken in 2022, if economies can relax social restrictions and consumers switch spending towards social consumption and away from goods.

US retail sales

US retail sales were weak in December, with US shoppers seemingly opting to do their Christmas shopping early. Sales fell by -1.9% month-on-month in December, having risen by +0.3% in November. Adjusted for price increases, real retail sale growth was likely closer to -2.4%. As well as supply chain disruptions causing shoppers to buy early, some goods may not have been available. A worsening health situation and higher prices may also have weighed on consumer appetite at what is a crucial period for retailors. However, the weak performance of online retail suggests that high prices had more to do with it than health.

Geopolitics

Relations remain tense between Russia and NATO following last week’s diplomatic talks. Representatives of the US and Russia met in Geneva for the first time in more than two years as Russian troops fringe Ukraine’s borders. However, a Russian foreign minister characterised NATO as an aggressive presence in Europe against Russia, putting forward a list of security guarantees to be met to avoid a “military response”. This includes no more former Soviet nations being allowed to join NATO including Ukraine, and limits on the deployment of troops along NATO’s eastern reach. The worsening relations between Russia and Europe further diminish the chances of Russia’s Nord Stream 2 gas pipeline being approved, which could ease high gas prices in Europe. German Chancellor Sholtz has indicated that the pipeline could be targeted if Russia carries out military action.

 

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