Pick Your Poison: Excessive Inflation, Stagnant Growth or, Most Likely, A Mix of Both
December 8, 2022
The lagged effects of higher interest rates are biting into economic growth, but inflation remains way too high. This mix presents central bankers with a tougher decision, and financial market participants are getting whip-sawed.
Compared to Wednesday closing levels the dollar is down 0.4% against the Canadian and Australian dollars, 0.2% versus the euro and Swiss franc and by 0.1% vis-a-vis the yuan and kiwi. The dollar also firmed 0.3% against the Mexican peso, 0.2% against the yen and 0.1% relative to sterling. On a weighted basis, the DXY dollar index has barely moved since yesterday.
Stock markets are somewhat lower in most countries, but a few continue to benefit from China’s decision to relax Covid restrictions. For example, the Hang Seng index soared another 3.4%. But more typically, the DJIA and German Dax are 0.5% and 0.2% lower.
WTI oil rebounded 2.0%. Gold edged up 0.2%, and Bitcoin is flat.
Ten-year sovereign debt yields have climbed today by ten basis points in Italy, 7 bps in the United States, six bps in France and Great Britain, and five basis points in Germany. The Bank of Japan continues to disallow upward movement in the comparable JGB, whose yield is unchanged at 0.24%.
Speaking of Japan, third-quarter GDP growth was revised from negative 1.2% to negative 0.8%, expressed at a seasonally adjusted annualized rate. This was the third contraction in the past five quarters, but year-on-year growth of 1.5% was little changed from 1.8% over the four quarters through 3Q 2021. Personal consumption expanded just 0.5% last quarter, and net exports exerted a 2.5 percentage point drag on quarterly GDP growth, but non-residential business investment experienced a second straight robust rise. The GDP price deflation fell 0.5% on quarterf and 0.3% compared to the same quarter a year earlier.
Japan’s current account swung to a JPY 64 billion deficit in October from a JPY 909 surplus in September and a JPY 1.734 trillion surplus in October 2021. Merchandise imports soared 56.7% on year. The seasonally adjusted current account moved into deficit also, registering a shortfall of JPY 609 billion versus a JPY 671 surplus in September.
Japan’s economy watchers index, a gauge of sentiment among service sector workers, fell back to a 3-month low in November from a 4-month high in October. Reflecting the dollar’s retreat last month, Japanese international reserves increased $31.8 billion in November after declining by $128 billion over the three prior months.
Consumer price inflation in Hungary climbed to a 315-month high of 22.5% last month from 7.4% a year earlier.
Although Mexican CPI inflation of 7.8% last month was down from a 262-month high of 8.7% in May-June, core CPI rose in the latest month by a tenth of a percentage point to a 267-month peak of 8.5%.
Irish consumer price inflation in November settled back 0.3 percentage points below October’s 38-year high to 8.9%.
In Egypt, CPI inflation rose 2.6% on month and 18.7% (a 59-month high) compared to November 2021.
A bigger CPI inflation retreat has occurred in the Netherlands to a 5-month low of 9.9%in November from 14.5% in September, but that reflects swings in energy almost entirely.
Some central bankers are in pause mode in the face of declining economic activity and being aware of a lot of monetary tightening now in the pipeline. The Central Bank of Brazil‘s Selic interest rate was kept unchanged at 13.75%, its level since a 50-basis point hike in August. The rate earlier had been lifted from 2.0% (March 2020 to March 2021) to 9.25% but the end of 2021 and its current level since August of this year. Brazilian CPI inflation has receded to 6.5% from 10.4% a year ago.
The National Bank of Ukraine faces unique conditions. During 2020 amid the pandemic, that central bank’s key interest rate was slashed to 6.0% from 10.5%, but tightening began as far back as March 2021 — 11 months before the Russian unsolicited invasion. The central bank was at 9.0% when 2021 ended, then hiked by 100 basis points in January 2022 as Russian forces massed on its border and catapulted by 15 more percentage points this past June to 25.0%. Although CPI inflation as of October at an 80-month high of 26.6% and thus still above the interest rate level, officials project GDP in Ukraine contracting by more than 30% this year and recovering less than 5% in 2023. The interest rate was therefore not raised additionally at this month’s meeting, but reserve requirements were tightened a bit.
At other central banks, the restoration of price stability remains the dominant priority. The Central Reserve Bank of Peru’s interest rate benchmark has undergone a fourth straight 25-basis point hike, reaching 7.5% versus 0.25% at the end of 2020 and 2.5% at the end of 2021. Peruvian inflation accelerated 0.2 percentage points to 8.45% in November, well above the year-earlier level of 5.7% and not to mention the medium-term target that is considerably less.
And the National Bank of Serbia just agreed to a ninth monthly rate hike in a row, lifting its rate by 50 basis points to 5.0%. Officials had throttled by the incremental rate hike size to 25 basis points in July and August but then returned to half-percentage point moves in September. At 5.0%, the interest rate is still way below CPI inflation, which jumped to a record 15.0% in October from 14% in September and 6.6% in October 2021.
The U.S. economy from a growth standpoint is doing better than most other economies around the world. New jobless insurance claims tallied 230k last week, which is still low historically. But continuing jobless claims in the latest available week of November 26th (1.671 million) had climbed from 1.346 million twelve weeks earlier.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Central Bank of Brazil, Central Reserve Bank of Peru, Japan current account, Japan GDP, National Bank of Serbia, National Bank of Ukraine