Week in Review: US Inflation Subdued

The U.S. Senate acquitted Donald Trump on Saturday of inciting the mob that stormed the Capitol last month, sparing him from conviction in his second impeachment trial in a year. The Senate voted 57-43 in favour of convicting the former president, falling short of the two-thirds majority needed to do so. Democrats had hoped to secure a conviction to hold him responsible for the siege, barring him from serving in public office again.

A key measure of prices paid by U.S. consumers was unchanged in January for a second straight month, underscoring the pandemic’s lingering restraint on inflation. The core consumer price index, which excludes volatile food and energy costs, increased 1.4% from the prior year, a U.S. Labor Department report showed Wednesday. The broader CPI once again got a boost from higher gasoline prices, advancing 0.3% from the prior month and 1.4% from a year earlier. price pressures are set to firm in the months ahead.

In an address to the Economic Club of New York, US Federal Reserve Chair Jerome Powell underlined that the central bank's new approach will ensure monetary policy continues to be a strong support to the economy “until the recovery is complete.” That, paired with the central bank’s willingness to let inflation run above its 2% objective for a period, means the Fed will likely leave interest rates near zero for some time. Many argue that very low interest rates justify higher equity valuations because of the lower discount they place on future earnings.

President Biden spoke by phone with Chinese President Xi Jinping on Wednesday, the first such conversation since US President Joe Biden's inauguration in January. The U.S. president raised a number of contentious issues during the two-hour call, underscoring his "fundamental concerns about Beijing's coercive and unfair economic practices, crackdown in Hong Kong, human rights abuse in Xinjiang and increasingly assertive actions in the region, including toward Taiwan."

First estimates are that the UK economy contracted 9.9% in 2020—the most since 1709—according to the Office for National Statistics. Output grew a greater-than-forecast 1% in the final three months of 2020 due to increases in government expenditures and gross capital formation.

The major U.S. indices finished modestly positive for the week helped by the accelerating rollout of vaccines, declining case trends and the increasing likelihood of additional fiscal stimulus. The S&P 500 finished the week with a gain of 1.2%, while the Dow added 1%. The tech-heavy Nasdaq rose 1.7%.

In Europe, former European Central Bank chief Mario Draghi was sworn in as Italy’s prime minister at the head of a new unity government. The pan-European STOXX 50 Index gained 1.09% while the UK’s FTSE 100 Index advanced 1.55% for the week. The Nikkei 225 Stock Average advanced 2.6% while Chinese markets rallied ahead of the Lunar New Year holiday with the Shanghai Composite Index rising 4.5% over the week.


Market Moves of the Week

In his State of the Nation address on Thursday evening President Ramaphosa said the country would undertake a massive vaccination program. He said South Africa had secured 9 million doses of the Johnson & Johnson vaccine, while an additional 20 million doses of the Pfizer vaccine were also on their way.

A credible plan to tackle SA’s spiralling public debt was a notable omission in the Presidents State of the Nation address. Finance Minister Mboweni is due to deliver what could be one of SA's toughest budgets on February 24.

The JSE All Share Index ended the week up +2.87%, led higher by all the major sectors.  By Friday close, the rand was trading at R14.55 to the U.S. Dollar, strengthening against all of the major developed market currencies for the week.


Chart of the Week

The core (excluding food and energy) consumer price index (CPI) remained unchanged in January, below consensus estimates of an increase of 0.2%. Federal Reserve Chair Jerome Powell said Wednesday that he doesn’t expect a “large or sustained” outbreak of inflation. He also reiterated that the central bank’s new policy framework could accommodate annual inflation above 2% for some time before raising rates.


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