News of the week summary - 11/05/2023

Why conflits keep interest rates high

The current global geopolitical landscape is significantly impacting interest rates. Traditionally, during times of international conflict and war, investors have sought refuge in safe-haven assets such as Treasury bonds, driving down interest rates. However, investors are now finding it increasingly difficult to secure their investments due to potential disruptions in the supply of essential commodities, which can lead to higher inflation and thus rates increases by central banks.

One example is the war between Israel and Hamas, which risks spreading across the oil-rich Middle East. This could lead to surging oil prices, up to $150 per barrel according to the World Bank's worst-case scenario. This would lead to sky-rocketing inflation, forcing the Federal Reserve to to raise interest rates. Another instance is the escalating rivalry between the United States and China, which reduces the flow of some commodities and goods, and can lead to reduced global economic activity and higher inflation. 

Inflation signifantly drops in the Eurozone 

Inflation in the Eurozone is experiencing a more significant drop than expected, primarily due to declining energy prices and reduced food and services inflation. The consumer price index, measuring the rate at which prices are increasing in the euro area, has fallen to 2.9% in October. 

Energy prices have played a pivotal role in this decrease, as they were about 11% lower this October than a year ago. Additionally, food inflation has continued to ease, dropping to 7.5% in October from 8.8% the previous month. Nevertheless, core inflation (which excludes food and energy because they are considered volatile) has still experienced a reduction of 0.3 percentage points.

These declining inflation rates are contributing to the perception that the European Central Bank's policy is having a cooling effect on demand within the eurozone. Indeed, Germany's economy suprisingly contracted by 0.1% in the third quarter, leading investors to expect the ECB will start cutting rates relatively soon.

Eli Lilly and Novo Nordisk fail to keep up with rising demand for their diabetes treatments

Eli Lilly and Novo Nordisk, pharmaceutical companies that produce diabetes medications Mounjaro and Ozempic, are facing a surge in demand for their drugs, driven by a growing need for obesity treatments. Both companies expect their medications to gain Food and Drug Administration's (the US regulator) approval for use in obesity treatment. However, the ability to meet this rising demand presents a significant challenge, mainly due to the complex nature of manufacturing injectable drugs.

Both companies are investing billions of dollars to expand their manufacturing capabilities and keep up with the skyrocketing demand. Novo Nordisk reported that the sales of its obesity drug called Wegovy, jumped by 734% to reach $1.37 billion. Their other medication, Ozempic, used for weight loss, saw its sales rise by 56% to reach $3.4 billion. 

Novo Nordisk said it would continue to restrict access to Wegovy to ensure existing patients could access the drug as demand for the product exceeds supply. Eli Lilly has been experiencing intermittent delays in fulfilling orders for certain Mounjaro doses due to high demand. Building new manufacturing facilities is a time-consuming process that can take several years to complete. Therefore, the supply constraints might only be fully resolved when oral medications, which are generally simpler to manufacture, enter the market. Pharmaceutical companies must make substential investments to meet demand for anti-obesity treatments, which is forecasted to be worth $77 billion by 2030.