U.S. GDP in the fourth quarter is positive, interest rate hike is imminent

[The U.S. economy is positive, and interest rates will be raised next week]

The economic data released by the United States in the fourth quarter performed better than expected, but the growth rate has slowed down. At the same time, the core PCE announced in the fourth quarter fell below 4%, making the Federal Reserve expected to further slow down the pace of interest rate hikes. Fed rate expectations have not changed much. Swaps suggest a 25 basis point rate hike at next week's FOMC meeting remains a certainty. The market expects to raise interest rates by 47 basis points in the next two meetings, and the peak policy rate in June is expected to be around 4.92%.

[Rolling economic recession may continue]

Economists are cautiously optimistic that the economy will avoid an outright recession and instead experience a rolling downturn, in which sectors decline sequentially rather than all at once. The market believes that due to technological progress and a highly transparent Federal Reserve, the lag time from the announcement of monetary policy to the final manifestation of its effect is shorter than before, which will cause the financial market and the real economy to operate under stronger policy expectations. Factory production has fallen sharply for two straight months as demand for goods has fallen. Layoffs in the tech sector are also seen as a signal of cuts in corporate capital spending. While residential investment is likely to decline for a seventh straight quarter, which would be the longest stretch since the bursting of the housing bubble triggered the Great Recession, there are signs the housing market may be stabilizing. Mortgage rates have been trending lower as the Federal Reserve has slowed its pace of rate hikes.

[Inflation in the euro zone may continue to run at a high level for a period of time]

For the US, UK, inflation may have peaked. Food price inflation may be gradually slowing, and energy price inflation is about to slow. Global commodity inflation has gradually slowed as pressure on many manufacturing supply chains has begun to ease. However, for the euro zone, due to the impact of the energy crisis and the natural gas crisis, the peak of this round of inflation may not yet appear, and it is expected to appear in the first quarter of 2023. Therefore, inflation may have peaked globally, but inflation in the euro area may continue to run at high levels for some time.

[The U.S. economy is strong in the fourth quarter, and the number of initial jobless claims has declined]

The U.S. economy maintained strong growth in the fourth quarter as consumers boosted spending on goods, but momentum appeared to slow sharply towards the end of the year as rising interest rates eroded demand. This may be the last quarter of solid U.S. growth before the lagging effects of the Fed's fastest monetary policy tightening cycle since the 1980s kick in. Most economists expect a recession in the second half of the year, though it will be milder than previous downturns. Retail sales have fallen sharply over the past two months, and manufacturing appears to be in recession along with the housing market. While the labor market remains strong, business confidence continues to deteriorate, which could ultimately weigh on hiring.

[The potential domestic demand in the United States may be quite weak]

U.S. GDP grew at an annualized quarterly rate of 2.9% in the fourth quarter, beating expectations, but underlying private domestic demand was rather weak. The combined contribution of household consumption, capital spending and residential investment was just 0.22%, the lowest since the second quarter of 2020. Inventories and exports combined contributed 2.2%, so this figure is basically a negative image of the first half, when strong demand was offset by those more transitory factors. Also, initial jobless claims fell short of expectations again, while durable goods orders, excluding aircraft orders, were largely flat, down slightly. It paints a picture of the economy decelerating, but companies (in general) still hungry for labor. This all creates an interesting contrast and raises the question of whether underlying domestic demand or labor demand is ultimately adjusted.

[EU discusses using frozen Russian assets to aid Ukraine]

EU member states have been told that the bloc has the legal authority to temporarily tap at least 33.8 billion euros ($36.8 billion) in frozen assets of the Russian central bank to help pay for Ukraine's reconstruction. The EU has been exploring access to frozen Russian assets since the Russia-Ukraine conflict, but the proposal is controversial and discussions are at a very preliminary stage. EU officials and some member states have been concerned about the legal basis for the move, and the precedent it could set.

[Europe cannot afford to confront the United States]

The vice president of the European Commission published an article in the British Financial Times, saying that although the European economy has shown extraordinary resilience and flexibility, the challenge is not over yet. Energy prices and inflation will continue to be high, and global supply chains will be under pressure And broader geopolitical changes will also persist. This is a huge challenge for the European industrial sector. During this period, the introduction of inflation-cutting bills in the United States encouraged the (re)relocation of industry to the United States, thereby potentially disadvantaging the EU cleantech industry. But the tit-for-tat response some are calling for could be deeply self-damaging to the economy.