Article

Fed vs inflation: The big fight accelerates

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week ending 6th May 2022.

| 7 min read

Volatility really picked up as some reassuring statements by Federal Reserve chair Jerome Powell quickly morphed into concerns about a shortage of skilled staff in the country, which is keeping wage inflation high. Wall Street rallied sharply on Wednesday before an abrupt reversal on Thursday. The leg up then down was the biggest U-turn in the market since the start of the Covid-19 pandemic. The index oscillated by more than 8 percentage points over two trading days.

Worries centred on the US jobs market and the potential for a “wage-price spiral” when rising wages drive companies to raise prices, which then prompts workers to demand pay that keeps up with inflation. It is precisely this outcome that drove the almost decade-long high inflation in the 1970s and early 1980s.

The US jobs market is clearly running hot. “The great resignation” continues, with a record 4.5 million US workers quitting the labour force in March, while the number of job openings hit a high of 11.5 million. The rising number of job openings and voluntary resignations have forced companies desperate for employees to raise wages and sweeten incentives to lure workers away from their old jobs. It is also likely that the peak of homeworking is close at hand.

This wave of risk aversion spread through global markets, resulting in the Nasdaq Composite recording its largest one-day fall since June 2020.

April was a bad month all around. The S&P 500 was down 8.8% over the month, Nasdaq was 13.3% lower and the FTSE 250 lost 2.1%. The FTSE 100 bucked this trend, gaining 0.4% in April supported by high weightings in healthcare and energy.

This week, the blue-chip FTSE 100 index was 1.1% lower by mid-session on Friday, with the more UK-focused FTSE 250 down 4.0%.

  • Podcast

Listen to our latest episode of, We need to talk about investing: The rising cost of everything, where Erica and Rob discuss why we’re seeing higher prices, everywhere.

Ukraine and energy markets

The European Union (EU) unveiled some of its toughest measures yet against Russia, including a total ban on oil imports and sanctions on war crimes suspects. European Commission President Ursula von der Leyen said the package was aimed at maximising pressure on Russia while minimising damage to Europe. Russian crude oil imports will be phased out within six months. Hungary has rejected the proposal and the Czech and Slovak governments want a transition period. The EU has already announced plans to reduce gas imports by two-thirds by the end of 2022.

Sharp rises in profits have prompted calls for a one-off windfall tax on energy companies.

BP's profits for the first three months of this year more than doubled after oil and gas prices soared following the Russian invasion of its neighbour. Shell reported a record first-quarter profit of $9.13 billion. Shell is the world's largest liquified natural gas (LNG) trader. It said sales of the fuel rose by 9% in the quarter to 18.3 million tonnes. LNG is seen as crucial to ending Europe's reliance on Russian gas. Sharp rises in profits have prompted calls for a one-off windfall tax on energy companies to help UK households grappling with rising bills.

After major promises and fine intentions at the COP26 climate conference in Glasgow last year, the world has discovered that it is still very dependent on fossil fuels following Russia’s war in Ukraine.

Covid-19

Senior Chinese Communist Party members issued a warning against questioning President Xi Jinping’s “zero-Covid” strategy, as pressure builds to relax controls. Politburo’s supreme Standing Committee pledged during a meeting led by President Xi to “fight against any speech that distorts, questions or rejects our country’s Covid-control policy”. This issue is of global significance because although the “dynamic” policy allows businesses to swiftly open after days – not months – of lockdown, Shenzhen and Shanghai are heavily restricted. Given the significance of these cities in the supply chain, the situation is likely to result in a continuation of supply-chain shortages, particularly in high-end manufacturing, technology equipment, and semiconductors,

Economics

The Federal Reserve announced its biggest interest rate increase in more than two decades, lifting its benchmark rate by half a percentage point. The US central flagged that similar moves were on the table for June and July. However, Chair Jerome Powell pushed back against a larger 75-basis point increase, a reassurance that sparked a rally on Wall Street.

The tight US jobs market is one obstacle that could derail the US central bank’s fight against rising prices. The jobless rate probably fell to 3.5% in April, matching the lowest reading since the 1960s, and many economists expect it to keep declining. Employment costs are growing at a record pace and could embed price rises in the system. These concerns were partly driving the equity-market sell-off that followed the post-Fed rally.

UK inflation is at a 30-year high and could reach 10% by the autumn.

The UK faces a "sharp economic slowdown" this year, the Bank of England has warned. The BoE increased interest rates to 1% from 0.75%, their highest level since 2009 and the fourth consecutive increase since December. UK inflation is at a 30-year high and could reach 10% by the autumn as Russia’s war in Ukraine boosts fuel and energy prices.

Geopolitics

US regulators have arrived in Beijing to settle a dispute over the auditing compliance of US-listed Chinese companies, Reuters reported. The stand-off, if not resolved, could see Chinese firms kicked off New York bourses. This week, the Securities and Exchange Commission (SEC) added more than 80 companies, including e-commerce giant JD.com and China Petroleum & Chemical Corp to the list of companies facing possible expulsion.

The SEC is also looking into Didi’s US IPO. The Chinese ride-hailing group said it was cooperating with the investigation. The company, which debuted on the New York Stock Exchange last year, said it couldn’t “predict the timing, outcome or consequences of such an investigation”.

Technology

The regulators are closing in on Big Tech. The European Commission accused Apple of abusing its market position for contactless smartphone payments and it may have broken competition law by preventing rivals from accessing its "tap and go" technology. Apple denies the charge.

The UK government sets out plans to force technology companies to abide by new competition rules or risk facing huge fines. The new Digital Markets Unit (DMU) will be given powers to clamp down on "predatory practices”, potentially fining companies up to 10% of their global turnover if they fail to comply.

MPs also invited Elon Musk to parliament so they can question him about his planned purchase of Twitter. The Commons Digital, Culture, Media and Sport Committee said it wanted to hear more about the billionaire's plans to balance "free speech" with "obligations to protect Twitter's users".

Uber reported a $5.9bn loss, mostly due to its stakes in other companies. The company said almost all of the loss was a result of the fall in the value of investments in businesses including two Asian ride-hailing giants – China's Didi and Asia's Grab.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Fed vs inflation: The big fight accelerates

Read this next

Markets grapple with stagflation

See more Insights

More insights

Article
The wisdom and madness of crowds
By Rob Morgan
Spokesperson & Chief Analyst
26 May 2022 | 7 min read
Article
Markets and governments adjust to a world of food shortages and high prices
By Charles Stanley
25 May 2022 | 6 min read
Article
Slowdown fears hit global stock markets
By Garry White
Chief Investment Commentor
20 May 2022 | 9 min read
Podcast
Unpicking the frenetic market action of recent weeks
19 May 2022 | 29 min listen