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Consumer squeeze causes UK slowdown

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers week ending 14 April 2022.

| 7 min read

Data from around the world highlighted the squeeze on consumers as energy and food prices rise. UK wage growth failed to keep up with the rising cost of living between December and February. Taking rising prices into account, regular pay showed a 1% year-on-year fall.

Ahead of the long Easter weekend, US markets were gearing up for the start of the first quarter earnings season, with a slew of Wall Street banks set to post results. Twitter shares jumped after Elon Musk made a takeover offer for the social-media group.

The blue-chip FTSE 100 index was 0.6% lower over the week by mid-session on Thursday, with the more UK-focused FTSE 250 down 0.5%.

Ukraine

The rally in oil prices lost some steam after data showed US crude oil stocks posting the biggest increase since March 2021. However, prices moved higher over the week, with Brent crude futures trading at about $108 a barrel mid-session on Thursday.

Stockpiles of some of the world’s most important industrial metals have dropped to critically low levels as record power prices in Europe hit production and the war in Ukraine threatens output from Russia. Inventories of aluminium, copper, nickel and zinc — four of the main contracts traded on the London Metal Exchange — have plunged by as much as 70% over the past year, as traders and big consumers have tapped warehouses for material. In recent weeks the trend has been most pronounced in zinc. The metal is used as a protective coating for steel in construction, cars and home appliances.

Ukraine's economy is set to shrink by almost half this year because of the war, the World Bank said. It also forecast that Russia's invasion will cause more economic damage across eastern Europe and parts of Asia than the Covid-19 pandemic.

Energy firm Ineos said it wants to build a fracking test site to show the process can be performed safely. The company claimed extracting shale gas in the UK could make the country "self-sufficient in ten years". The company has written to the government asking to develop a site, with its boss Sir Jim Ratcliffe saying such a move would "reduce the cost of energy" and ensure "long-term energy independence". The offer came after the government ordered a new report into fracking.

Economics

The UK's economic growth slowed in February, hit by a sharp fall in the production of cars and computer goods. The Office for National Statistics (ONS) said the economy expanded by 0.1% compared with 0.8% in January. The fall in manufacturing was offset by growth in the services sector including areas such as tourism and travel. The UK economy is now 1.5% larger than its pre-pandemic level in February 2020.

UK wage growth failed to keep up with the rising cost of living between December and February. Taking rising prices into account, regular pay showed a 1% year-on-year fall, as inflation hit a 30-year high. This may explain the fall in retail sales last month. Figures from the British Retail Consortium (BRC) showed sales growth for March rose at its slowest rate so far this year, with UK retail sales down 0.4% from 12 months earlier.

UK consumer price inflation hit to 7.0% in March, ahead of expectations of 6.7% and up from 6.2% in February. Financial markets think the Bank of England is all but certain to raise interest rates to 1% from 0.75% on 5 May before taking them to 2%-2.25% by the end of 2022, although many economists believe the central bank will not move that aggressively.

Central banks around the world are moving in a tightening direction, albeit at a different pace. The Fed under the Biden administration is different to that that served Donald Trump.

China's factory-gate and consumer prices rose faster than expected in March.

The US inflation rate hit a fresh 40-year high in the year to March after fuel prices soared during the first full month of the Ukraine war. Consumer prices surged by 8.5%, which was the largest annual gain since December 1981, following a double-digit rise in energy prices.

China's factory-gate and consumer prices rose faster than expected in March as Russia's invasion of Ukraine, persistent supply chain bottlenecks and production snags caused by local Covid-19 lockdowns added to commodity cost pressures. China's producer price index (PPI) increased 8.3% year-on-year, data from the National Bureau of Statistics (NBS) showed. While that was slower than the 8.8% seen in February, it was ahead of a consensus view of 7.9%. Consumer prices rose 1.5% year-on-year, the fastest in three months, speeding up from 0.9% in February and beating expectations of 1.2%.

The new worries about food and energy are leading to more interventionist policies as governments try to find ways to bolster domestic output and source imports from friendly and reliable countries. There are three possible outcomes.

Covid-19

The lockdowns in Shanghai under Beijing’s “zero-Covid” policy are impacting global supply chains that rely on China. Shipping groups are cancelling or postponing sailings:

  • Maersk said it’s experiencing an “accumulation of delays on our services”, driven chiefly by port terminal congestion that required changes in the scheduled departures of 11 container vessels from China through mid-July.
  • MSC said it was cancelling two sailings in late-April from China to Europe because of “challenging market situation generating congestion and schedule delays across the supply chain.”
  • Hapag-Lloyd, which launched its China-to-Germany express ocean service over the weekend, is changing the destination from Hamburg to Wilhelmshaven “until the high yard density in Hamburg stabilises and allows smoother operations.”

Pegatron, a major producer of Apple's iPhone, suspended production at two of its factories in China. Apple MacBook manufacturer Quanta and iPad maker Compal Electronics have also paused activities in Chinese cities, according to Japanese newspaper Nikkei.

Environmental, social & governance

Japan's Honda plans to spend $64bn on research and development over the next decade, with management setting an ambitious target to roll out 30 electric vehicle models globally by 2030, producing 2 million electric vehicles a year.

Technology

Elon Musk Elon Musk says he has made his ‘best and final offer’ for Twitter, which he says needs to be ‘transformed as a private company’. In a letter to Bret Taylor, Twitter’s chair, Musk argues that he will unlock Twitter’s ‘extraordinary potential’ if he succeeds in buying 100% of the company. The Tesla boss is now Twitter's largest shareholder but refused to take a position on its board.

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Consumer squeeze causes UK slowdown

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