Markets last week 08/08/2022

The tension between the United States and China had a ripple effect on the euro market as well. Core euro zone bond yields ended at level despite comments from the fed reserve helping drive yields up. UK gilt yields broadly followed core markets but ended the week slightly higher after the Bank of England (BoE) increased rates by a large amount and warned a recession could be looming. 

The Bank of England raised its key interest rate by 50 basis points (0.50 percentage points) to 1.75%, the most in 27 years. It also predicted that rising energy prices would cause inflation to reach 13.3% by October. The central bank expects inflation to remain “very elevated” through 2023 before falling to its 2% target in two years. It predicted that a five-quarter recession would begin this winter. 

According to the European Commission’s statistics bureau, the number of unemployed people in the eurozone increased for the first time in 14 months in June. The unemployment rate remained unchanged at a record low of 6.6%, but the number of job seekers increased by 25,000 to slightly less than 11 million. 

The eurozone manufacturing sector contracted last month, with final data from S&P Global July purchasing managers’ surveys indicating the sharpest drop in output since the initial wave of COVID-19 lockdowns in spring 2020. New orders have fallen to their lowest level since the eurozone sovereign debt crisis in 2012. 

According to final data from a survey of German purchasing managers compiled by S&P Global, German manufacturing activity contracted in July for the first time in two years, as new orders fell, and firms became increasingly pessimistic about the outlook. This has been caused by soaring prices and rampant inflation, trade wars and rising tensions between the West and China, supply shocks from the COVID pandemic, and, most recently, the war in Ukraine have all upended the order that has underpinned much of Germany’s recent prosperity. 

Core eurozone sovereign yields changed little. German bund yields, on the other hand, began to rise following the better-than-expected employment report in the United States on Friday morning. This week, gilt rates in the United Kingdom rose significantly. The sharp rise in the US dollar weighed heavily on all currencies, but the USD/EUR currency pair approached parity this week. 

According to the minutes of the European Central Bank’s (ECB) June meeting, most members agreed to a 25-basis-point increase in the deposit rate in July, with a 50-basis-point increase expected in September. In the eurozone, producer prices increased by 36.3 % year on year in May. Prices rose 16% excluding energy. Meanwhile, retail sales volumes increased by a smaller than expected 0.2 % in May. April sales volumes were revised up to 1.4 %. 

Germany’s trade balance showed a EUR 1 billion deficit in May, the first since 1991, as exports fell unexpectedly, owing in part to supply constraints. Meanwhile, imports increased due to higher food, energy, and material prices. After falling for three months in a row, German factory orders unexpectedly increased by 0.1%. Furthermore, the magnitude of the month-to-month contraction in April’s factory orders was revised to 1.8% from 2.7%. However, industrial output rose sequentially by a smaller than expected 0.2% due to supply chain problems.