Slew of U.S. Executive Orders and Central Bank Policy Reviews

January 21, 2021

President Biden’s inaugural address yesterday called for national unity to face down the many severe challenges now juxtaposed. 17 executive orders followed to reverse several polices of the Trump era. Contrary to warnings, inauguration day was free of domestic violence. U.S. stocks experienced their greatest advance on a presidential inauguration day since 1985, when Reagan was sworn in for his second term.

The depreciating trend of the dollar continues, with declines overnight of 0.7% against the kiwi, 0.5% relative to sterling, 0.4% versus the euro, Swiss franc and Australian dollar, 0.2% vis-a-vis the Mexican peso and Canadian dollar, and 0.1% against the Japanese yen. U.S. stock futures are up slightly. In Asia, share prices closed higher, but European markets are narrowly mixed, and so are the prices of WTI oil (down 0.3%) and gold (+0.1%). 10-year U.S., German and British sovereign debt yields edged a basis point higher.

Covid data remains bleak. Reported U.S. cases will soon surpass 25 million (the real number is likely far higher due to undetected victims). 4, 367 Americans died on inauguration day, but the Biden administration is wasting little time revamping the whole approach to containing the pandemic.

There’s been a parade of monetary policy reviews, none resulting in an interest rate change.

The Bank of Canada‘s overnight target rate was left at 0.25%. This effective lower boundary has been the rate level since a trio of 50-basis point cuts in March 2020. The rate will not be lifted before economic slack — estimated to be between 2.75% and 3.75% of GDP according to a released policy statement — has been largely reabsorbed. This is unlikely before 2023. This month’s meeting coincides with the publication of the central bank’s quarterly Monetary Policy Report. After taking a big hit in 2021, real GDP in Canada is projected to recover 4% this year, 4.8% in 2022, and then throttle back to growth of 2.5% in 2023. CPI inflation doesn’t average at the 2% gola until 2023.

The Bank of Japan‘s policy board chose to retain interest rates of -0.1% on overnight money and “around zero percent” on the 10-year JGB yield. The policy of Quantitative and Qualitative Easing with Yield Control will be maintained for as long as needed to achieve the elusive goal of sustainable 2.0% core CPI inflation, and officials expected to period above that level to be attained before they will be confident enough to exit the strategy. Quantitative settings were not changed either, but as before the Board recommits to being prepared to augment easing if that is needed. Today’s policy statement was accompanied by updated forecasts and the quarterly Outlook for Economic Activity and Prices. GDP is now projected to sink 5.6% this fiscal year before recovering 3.9% in fiscal 2021 and 1.8% in fiscal 2022. Inflation doesn’t even reach 1% by fiscal 2022.

Having augmented the ECB’s Pandemic Emergency program (PEPP) of asset purchases by half a trillion euros and extending this “very accommodative” quantitative stimulus from mid-2021 to March of 2022 at its final policy review of 2020, the European Central Bank governing council left all quantitative and interest rate settings unchanged at its first meeting of 2021. A released statement enumerates current policy and forward guidance. The overnight deposit rate has been at minus 0.5% since a 10-basis point cut in September 2019.

The Central Bank of Brazil‘s Selic interest rate was maintained at 2.0%. From February through August last year, the rate had been reduced by a total of 300 basis points. A statement from policymakers today “judges that today’s decision reflects a baseline scenario for prospective inflation, a higher-than-usual variance in the balance of risks, and it is consistent with the convergence of inflation to its target over the relevant horizon for monetary policy, which includes 2021 and, mainly, 2022.”

Satisfied that sufficiently low inflation and external stability will remain preserved, officials at Bank Indonesia reduced their 7-day repo rate by 25 basis points on five occasions last year (most recently in November). At its first meeting of 2021, the Board of Governors agreed to leave the key benchmark at 3.75% and thereby support recovery from the pandemic-induced recession. “Domestic economic growth, which improved through to the end of 2020, is expected to gradually gain momentum in 2021,” according to a released statement . CPI inflation of 1.68% now lies below the 2-4% target.

The Bank of Norway‘s policy rate, which had been reduced in three moves by 150 basis points between March and May of last year, was left at 0.00% and will stay at that level “for some time ahead” according to a statement following today’s monetary policy review. While recovery has proceeded as anticipated and despite above-target inflation at the moment, many uncertainties imposed by Covid persist.

The National Bank of Ukraine‘s 6.0% policy rate is being maintained, according to a released statement. Compared to 12.5% at the start of 2020, the interest rate benchmark was slashed by 150 basis points in January, 100 bps in March, and 200 bps each in April and June to its current level. While projected inflation this year has been revised a bit higher and lies above target, Covid still poses risks, and officials expect inflation to settle back to the 5% goal by 2022-23.

The Turkish one-week central bank repo rate rode a roller-coaster in 2020, first getting cut in five moves by 375 basis points during the initial five months of the year, but later being lifted in three moves by 875 bps during the final four months. The rate presently is at 17.0% to combat a toxic cycle of lira depreciation and accelerating domestic inflation. The Central Bank of Turkey’s released statement today did not tighten further but leaves the door ajar to the possibility of further tightening down the road. Before cutting rates, officials want to see inflation, which ended 2020 at a 16-month high of 14.6%, embark on a downturn that they are convinced will endure.

By a 3-2 vote with two policymakers preferring a 25-basis point cut, members of the South African Reserve Bank monetary policy committee agreed to retain a record low 3.5% interest rate after their first review of 2021. According to a released statement, real GDP likely tumbled 7.1% in 2020 and is projected to recover 3.6% this year and 2.4% in 2022. CPI inflation is anticipated to average 4% this year and 4.5% in 2o22.

Today’s menu of released U.S. economic data provided mixed news. New jobless insurance claims last week of 900k followed the prior week’s 4-1/2 month high of 926k and lifted the four-week moving average by 24k to 848k, most since last September. On the other hand, the Philly Fed manufacturing index printed 17.4 points higher in January at a 2-month high of 26.5, and housing starts rose 5.8% in December to 1.669 million, most since September 2006. Building permits climbed 4.5% on month and 17.3% above its year-earlier level.

Australian unemployment fell unexpectedly to 6.6% in December from 6.8% in November and 7.0% in October. On top of an 89.9k increase the month before, 50k jobs were added to the economy last month as labor market participation swelled to a 16-month high.

Japan’s December and full-2020 trade surpluses were similar in size at JPY 751 billion and JPY 675 billion. December exports were 2% higher than a year earlier, but imports posted a year-on-year drop of 11.6%. Japan had trade deficit in both 2018 and 2019.

Britain’s industrial trends survey for January produced a 2-month low in the orders component to -38. More bad news was revealed by the quarterly manufacturing confidence index that sank from -1 in 3Q20 and 0 in 4Q20 to -22 in the current quarter.

French manufacturing confidence improved 4 index points, by contrast, to 88 in January versus 94 in December and a reading of 68 last April.

Consumer confidence the Netherlands printed in January at a 10-month high. Turkish consumer confidence this month rose to a 21-month high. But consumer sentiment fell in to a 2-month low in Denmark and Belgium.

Hong Kong consumer prices were below year-earlier levels for a sixth straight month in December, this time by 0.7%. But Icelandic CPI inflation edged 0.1 percentage point higher to 3.6%.

South African retail sales increased 1.8% on month in November but posted their largest on-year drop (4.0%) since August.

Mexican and Dutch unemployment fell to 9-month lows in December of 3.9% and 3.8%.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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