Where Are We Headed?
This weekly is on the early side and I am wary of what Friday brings, especially as the debt ceiling saga gives rise to further bond market volatility.
Global manufacturing activity is strong, but the services sector still remains subdued. Services could start to improve though once the impact of economic stimulus and vaccinations starts to filter through. We’re seeing more inflationary pressures from rising food and energy prices, the latter largely down to OPEC and Russia holding back production. Many see this as big force behind recent government bond yields rises. Some feel as if central banks are in a “cart-horse” position – they need a sell-off first before buying bonds to keep those rates from going up. Instead, it’s the other way round at the moment.
The spat between the UK and EU has flared up again. The UK has decided to extend the grace period for checks on food imports to Northern Ireland by 6 months until October. The EU is unhappy, with one official saying the UK’s new approach to everything is confrontation, and has threatened legal action. This requires issuing a letter of formal notice, to which the UK will have two months to respond. That is then followed by “reasoned opinion” – also two months. If this fails, the Withdrawal Agreement’s dispute settlement system kicks in where the two have to consult for up to three months. If still no result, either side can request an arbitration panel to intervene, which has up to 12 months to make a ruling (or 6 months if urgent). All those time periods added up come to far more than the 6-month extension the UK has instigated. Interesting negotiating tactic.
In the UK the construction PMI rose to 53.3 (Jan: 49.2) with commercial development the main driver.
The FAO’s February world food price index reached 116.0, the ninth gain in a row (Jan: 113.3). The index covers a basket of cereals, oilseeds, dairy products, meat and sugar.
OPEC and Russia decided against releasing significantly more crude oil sending oil prices soaring. The group decided against a collective 0.5MN barrel increase (Russia and Kazakhstan have been allowed a small, total rise of +150K bpd)
In the EU, manufacturing PMI for February jumped to a 3y high of 57.9 (Jan: 54.8); French Manufacturing hit 56.1 (Jan: 51.6). German Manufacturing hit 60.7 (Jan: 57.1)