Take Two: EU sharply scales back Russia oil imports; Japan factory output dips

What do you need to know?

European Union countries agreed a partial ban on Russian oil imports, cutting around two thirds of imports immediately and 90% by year-end. The deal, designed to exert fresh financial pressure on Moscow as the war in Ukraine approached the 100-day mark, made a concession allowing Hungary, Slovakia and the Czech Republic to access the Druzhba pipeline. It also included a ban on European insurance of ships transporting Russian oil. Oil prices spiked on the news, also driven higher by expectations of increased demand from China as COVID-19 restrictions are lifted. Meanwhile, equity markets closed out a volatile May largely flat, but still materially lower over the year to date.¹

Around the world

Annual inflation in the Eurozone jumped to a record high of 8.1% in May, adding to pressure on the European Central Bank (ECB) to tighten policy. The bigger-than-expected increase, which came after a reading of 7.4% in April, was driven by energy and food, as the Ukraine conflict sent commodity prices soaring. Meanwhile inflation in Germany, the biggest economy in the 19-country bloc, rose to 8.7%, its highest since the 1973 oil crisis. The ECB had already indicated it could raise interest rates in July and some economists now believe that a 50-basis point (bp) hike is possible.

Figure in focus: -1.3%

Japan’s factory output fell 1.3% in April from a month earlier, as coronavirus-driven lockdowns in China caused supply chain problems for Japanese manufacturers. The fall – the first in three months – was bigger than expected, but factory activity is expected to regain momentum as China’s restrictions ease. This fall was echoed in a 3.3% drop in South Korean output. More positively, Japanese retail sales rose 2.9%, their steepest gain in almost a year as Japan’s government relaxed COVID-19 restrictions. Unemployment fell to 2.5% - the lowest level in more than two years.

Words of wisdom

Geoengineering: A catch-all term for technologies or practices that may be able to partially offset the impacts of climate change. Many of the proposed geoengineering options are considered last resorts, only joining the policy mix due to a failure to meet the more ambitious targets for emissions reductions. They include relatively simple measures such as painting roofs white to limit heat build-up in cities, but also more elaborate ideas like putting sulphur particles into the atmosphere to reflect sunlight or using iron to absorb carbon dioxide in the oceans.

What’s coming up

China’s Caixin Purchasing Managers’ Indices are published Monday, while on Tuesday the Reserve Bank of Australia convenes to decide on interest rates – at its May meeting, it hiked its cash rate by 25bp to 0.35%. Japan and the Eurozone post their latest estimates for first quarter GDP growth on Wednesday. On Thursday the ECB holds its latest monetary policy meeting while Friday sees Canada and the US respectively announce unemployment and inflation data for May.