Many Central Bank Meetings and a Stunning Deceleration of U.S. Import Price Inflation

December 13, 2018

The dollar shows no net overnight change against the Swiss franc, Chinese yuan, New Zealand dollar, or Canadian dollar. The greenback rose 0.8% versus the Mexican peso, 0.4% relative to the yen, and 0.1% versus the euro while dipping 0.1% vis-a-vis the Australian dollar and sterling.

Asian equities rallied, but share prices in Europe and North America have turned cautious. Stocks closed up 1.2% in China, 1.5% in Hong Kong, 1.0% in Japan and Indonesia, and 0.4% in India and Singapore. The S&P 500 is flat, and the British and German stock markets show minuscule 0.1% upticks.

Ten-year sovereign debt yields have dropped 7 basis points in Italy, 2 bps in the U.K., and a basis point each in Germany and the United States.

WTI oil rose 0.6%, while gold slid 0.3%.

British Prime Minister May survived yesterday’s vote of confidence, but the resolution of the Brexit thing remains as uncertain as ever.

Market sentiment continues to oscillate wildly regarding whether U.S.-Sino trade differences can be resolved without a major further escalation of tit-for-tat tariffs. The mood on this score  is more cautious today than yesterday.

The European Central Bank confirmed that its extensive asset purchase program will indeed end after this month. EUR 2.6 trillion were acquired, and maturing issues will continue to get reinvested for “an extended period of time” according to a released statement. This ending of quantitative stimulus was counterbalanced by downward revisions to projected growth and inflation in 2019, an admission that economic risks, though still balanced overall, have veered a bit to the downside, and the reiteration that central bank interest rates will not be raised from current levels at least through the summer of next year. Those rates were retained at zero percent on the financing rate, minus 0.4% on the overnight deposit rate, and 0.25% for the marginal lending facility rate.

The Swiss National Bank’s quarterly monetary policy review as expected left the sight deposit rate target at negative 0.75% and the 3-month Swiss Libor range at -1.25% to -0.25%. These rates were established in mid-January 2015 when officials ended the asymmetric Swiss franc ceiling of 1.2000 per euro but cut the interest rate by 50 basis points. A released statement today said that in spite of some depreciation since the September policy review, the franc remains highly valued and that discretionary intervention will continue to be employed on an as-needed basis. Of additional importance, officials revised the projected inflation path downward. Such bottoms at 0.4% in the middle two quarters of 2019, doesn’t rise to 1.0% until the summer of 2020, and is still a tad under 2.0% as late as the summer of 2021. Projected economic growth in 2019 of 1.5% is a full percentage point lower than this year’s pace, and a litany of potential depressants such as protectionism and global political uncertainties are  mentioned.

The Central Bank of Turkey’s Monetary Policy Committee left the one-week repo rate of 24.0% unchanged but warned in a statement that “inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to rebalancing process, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.” The benchmark interest rate had been jacked up 625 basis points in mid-September to the current level, which followed rate hikes totaling 500 basis points in the second quarter of this year and 275 basis points in 2017. This was the second policy meeting in a row not to raise rates, a decision that could be justified by a greater-than-projected drop in inflation last month.

The Central Bank of Brazil’s Selic interest rate was kept at 6.50% at the last scheduled policy review of 2018. This record low was attained after a 25-basis point cut back in March that culminated 775 basis points of easing going back to October 2016. Inflation fell to a 6-month low of 4.05% last month and thus lies in the bottom half of a 3-6% targeted range. A released statement projects soft growth and in-target inflation.

The Bank of Norway’s Executive Board kept  its interest rate benchmark steady at 0.75%. An easing cycle that cut the rate by 175 basis points between 2011 and March of 2016 was reversed this past August by a 25-basis point hike, and a released statement after today’s review projects a continuing economic upswing. However, the statement stresses the need for caution in considering further rate increases, enumerating dangers of normalizing both too rapidly and too slowly. In short, only a gradual rise is contemplated, including a single likely move by next March.

The National Bank of Ukraine’s key interest rate had been raised six times between October 2017 and September 2018 by a total of 550 basis points to 18.0%. Although inflation last month of 10.0% was twice the goal of 5.0% to be reached in 2020, officials did not tighten further at the last policy review of 2018. According to a released statement, inflation risks — e.g., the drop in energy prices and less aggressive rate normalization by the Federal Reserve — have lessened. For now, officials think enough monetary policy restraint is now in Ukraine’s pipeline to cut inflation  in half, but the statement leaves the door open for more rate increases: “risks to inflation decreasing to its 5% target still remain high. If these risks materialize, the NBU may raise the key policy rate to a level required to bring inflation back to its target within a reasonable timeframe.”

In The Philippines, the central bank left its overnight reverse repo rate unchanged at 4.75%, having raised such four times this year between May and September by a total of 150 basis points. Due to lessening food price pressures among other factors, a released statement projects a somewhat lower future path of inflation and asserts that such will stay inside the 2-4% target in 2019 and 2020.

U.S. import prices plunged 1.6% in November, which slashed the 12-month rate of increase to 0.7% from 3.3% the month before and a 2018 high watermark of 4.8% in July. Fuel prices sank 11.0% on month but rose 4.6% on year, while all other import prices dipped 0.3% on month and edged only  0.3% higher on year.

U.S. new jobless insurance claims fell 27K last week to 206K, but the four-week average of 224-3/4K was still above an average of 215.25K in the previous four weeks through November 10.

German CPI inflation in November was confirmed at 2.3%, down 0.2 percentage points from October’s pace but matching September’s result. Energy accelerated further to 9.3% but should recede in coming months. Core inflation slowed to 1.5% from 1.7%.

French CPI inflation slowed 0.3 percentage points to an 8-month low of 1.9% in November.

Switzerland’s combined PPI/import price index fell 0.3% on month and to a 12-month increase of 1.4% in November form 2.3% in October. Domestic producer prices slid 0.3% on month and was halved to a 0.7% year-on-year increase.

South African producer prices rose 0.4% on month and 6.8% on year in November.

Chinese foreign direct investment in November was 26.3% smaller than in November 2017, but the year-to-date level posted a drop  of just 1.3%.

New home prices in Canada were just 0.1% higher in October than a year earlier.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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