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BOV Market Watch - Week ending 7th October 2022
06 Oct 2022

Eurozone’s PPI Inflation Reaches New Record High   Data released by Eurostat, the EU’s statistical unit, on Tuesday, showed that Eurozone producer price inflation accelerated more-than-expected to a fresh record high in August, due to soaring energy prices. On a monthly basis, producer prices increased by 5.0 percent in August, marginally above the expected increase of 4.9 percent, and after rising 4.0 percent in July. On a monthly basis "Industrial producer prices increased by 11.9% in the energy sector, by 0.9% for non-durable consumer goods, by 0.3% for capital goods and for durable consumer goods and by 0.1% for intermediate goods," Eurostat reported. Overall producer prices rose 0.3 percent, excluding energy. On an annual basis producer prices rose by 43.3 percent, faster than the revised 38.0 percent rise in July. Energy prices continued to increase throughout the last twelve months, amounting to a sharp rise totalling 116.8 percent, on an annual basis.

Spain’s Services and Manufacturing Purchasing Mangers’ Indexes Contracting The Spanish Services Purchasing Managers' Index (PMI), dropped to contraction level of 48.5 in September from 50.6 in August. For the first time in nine months, both activity and new business fell, due to deteriorating market conditions, dragged lower by inflationary concerns driven by increased energy and utility costs. New export business declined for the third successive month. The Spanish Manufacturing PMI also weakened further in September, to 49.2, down from 49.9 in August, as industrial activity has been hit hard by the current high energy prices. This manufacturing sector also faces other costs rises as operational expenses rose at the sharpest rate in three months. Meanwhile, falling demand will make it difficult to pass on higher costs to the end consumer, consequently squeezing further profit margins. With both the manufacturing and service sectors PMIs falling below the 50 level, recessionary concerns are rising.

U.S. GDP Contracts by 0.6% In Q2 The U.S. Commerce Department published its third revised estimate of  economic activity during the second quarter, revealing that the headline decrease in gross domestic product was unchanged from the previous estimate. As expected, this report confirmed  that real Q2 GDP fell by 0.6 percent, unchanged from the decline reported last month. This follows a 1.6 percent contraction in  Q1, and hence the two consecutive quarterly decreases indicat that the U.S. economy is in a technical recession. The US Q2 GDP declined due to a record trade deficit, the end of the pandemic stimulus and a sharp decline in business spending, especially on new inventories. A reduction in so-called gross domestic income, basically wages and profits, was the biggest report revision surprise. The growth in income, was revised down in the Q2 report to 0.1% from a previous 1.4%. Income growth was also lowered to 0.8% in Q1 from 1.8%.Meanwhile, US economic activity is still expected to post a rebound in the  third-quarter GDP report, with median forecasts indicating a weak 0.6 percent growth, a sharp downgrade from the previous 7th September estimate of  a much stronger 2.0 percent growth. U.S. growth is slowing, albeit the strongest labour market in decades, dragged by the US central bank, which is quickly tightening monetary policy to tackle high inflation.

RBA raises interest rates by 25 basis On Tuesday, the Reserve Bank of Australia (RBA) raised its benchmark rate by a smaller-than-expected 25 basis points, to 2.60 percent from 2.35 percent, leading to the highest rate since July 2013, after tightening monetary policy by 50 basis points in each of the last four meetings. RBA’s Governor stated that the latest rate rise will help to achieve its goal of bringing inflation back to the 2-3 percent target range and further increases in interest rates are likely to be required. The RBS is aiming to achieve its inflation target while keeping the economy on stable track, notwithstanding that the outlook for economic growth has recently deteriorated. Another uncertainty is how Australian household spending will respond to the tighter financial conditions. The RBS signalled that the magnitude and timing of future interest rate increases will continue to be determined by the incoming data and its assessment of the outlook for inflation and the labour market.

OPEC+ Production Cuts On Wednesday, during its monthly meeting, this time held physically in Vienna, OPEC+, swiftly agreed its biggest oil production cut since the height of the pandemic in 2020, restricting supply in an already tight market. This decision has clashing geopolitical implications, as it comes despite appeals from the US and others to increase oil output, after oil prices spiked this spring when the hostilities in Ukraine disrupted supplies. The stated production cuts amount to 2 million barrels per day, which equates to around to 2% of global supply. Saudi Arabia remarked that this was necessary to respond to rising interest rates and a weaker global economy. OPEC+ also hinted that they wanted to stabilise prices, which have fallen in recent months as the world economy slowed. This production cut is based on existing baseline figures, which means the cuts would be factually less deep, as under-production has materialised due to Western sanctions and output problems with non-sanctioned producers. Saudi’s Energy Minister, Prince Abdulaziz said the real cuts would be about 1.0-1.1 million bpd.

 

 

 

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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).