Market Commentary 21st December 2021 from Charlie Hancock

The Bank of England (BoE) raised interest rates from 0.10% to 0.25% following their Monetary Policy Committee meeting last week. Whilst concerns around the economic impact of the Omicron variant had previously cast doubts on a rate rise, policymakers appeared to be focussed on inflationary pressures. Data released on Wednesday ahead of the BoE meeting showed that the UK Consumer Price Index (CPI) rose by 5.1% year-on-year in November.

Travel and leisure stocks were volatile, with investors weighing up the possible impact of further coronavirus related restrictions. Budget airline easyJet PLC suffered a sharp decline during the first half of the week, before recovering some ground on Thursday and Friday to finish the week down by 3.27%. The Restaurant Group PLC saw their share price move in a similar fashion, posting a decline of 3.02% for the week.

The current wave of coronavirus cases prompted Germany’s central bank to lower their growth forecasts, with the expected Gross Domestic Product (GDP) increase for 2021 cut from 3.7% to 2.5%. The Bundesbank now expects growth of 4.2% in 2022, down from their previous estimate of 5.2%.

Data published last week showed that Eurozone inflation has reached the highest level recorded since the Euro was created. The Consumer Price Index rose by 4.9% in November, with soaring energy prices (+27.5% year-on-year) being the main driver.

Investors paid close attention to the Federal Reserve’s policy meeting. The Fed announced they would accelerate the tapering of their quantitative easing programme, with asset purchases now expected to stop in March 2022. The central bank indicated they will not hike rates until the asset purchase programme is wound up, with members of the bank’s policy committee expecting to implement three 0.25% hikes during 2022.

The Fed Chair, Jerome Powell, stated during a post meeting press conference that the Omicron variant does not currently justify continuing their asset purchase programme for longer than planned. Powell suggested that the US economy is in good health, with consumer demand “very strong”.

The Chinese central bank introduced measures to weaken the Yaun, with the currency strengthening against the US Dollar during recent months. Policymakers emphasised the need for economic stability at the government’s annual Central Economic Work Conference, acknowledging that the pandemic remains disruptive to Chinese economic growth. The Ministry of Finance announced they would grant loans to local governments ahead of schedule to support fiscal spending. Policymakers also suggested they were considering policies to boost consumer demand, particularly for automobiles and home appliances.

The Bank of Japan (BoJ) maintained their dovish stance, leaving interest rates on hold at -0.10%.  The BoJ appeared keen to support small and medium sized businesses well into next year, extending a key lending facility until September 2022. The central bank stated that supply side constraints remain an issue for Japanese economic growth.

The Eurozone Central Bank (ECB) kept interest rates unchanged following their policy meeting last week and appeared to rule out the possibility of an interest rate rise during 2022. The central bank appeared keen to emphasise that the withdrawal of monetary stimulus will be very gradual, with economic growth still under threat due to the pandemic.

GBP / EUR – Current 1.1780 Previous 1.1727

Uncertainty around Covid-19 restrictions and the outlook for UK economic growth appeared to override the impact of an interest rate rise last week, with the Pound weakening by 0.21% against the US Dollar. The Pound rose by 0.45% against the Euro, with the ECB’s relatively dovish stance weakening the Euro last week.