Monetary Policy Differences Starting to Emerge Across Nations

February 24, 2021

The dollar weakened 0.7% overnight against its closest neighbors, the Mexican peso and Canadian dollar. The greenback also fell by 0.6% versus the kiwi, 0.2% relative to the yuan, and 0.1% vis-a-vis the Australian dollar and sterling but advanced 0.6% relative to the Japanese yen and 0.3% vis-a-vis the Swiss franc.

Equities were clobbered in the Pacific Rim but have risen in Europe. The daily losses amounted to 2.5% in South Korea, 2.0% in China, 3.0% in Hong Kong, 1.6% in Japan, 1.4% in Taiwan, 1.0% in New Zealand and 0.9% in Australia. Share prices so far today have risen 1.3% in Switzerland and 0.8% in Germany. U.S. futures are little changed.

Concerns that pent-up inflationary pressures will be unleashed after the pandemic continue to rattle fixed income securities, with the U.S. 10-year Treasury yield rising 4 basis points overnight to 1.37%. The 10-year British gilt yield climbed 3 basis points. Britain had done a far better job than the European Union in vaccinating its population. The 30-year U.S. fixed mortgage rate rose ten basis points last week to a 5-month high of 3.08% and was associated with the largest weekly collapse in mortgage applications (-11.4%) in ten months.

Among commodities, West Texas Intermediate oil advanced 1.0% today in spite of yesterday’s news of an unexpected rise in U.S. inventories. The price of gold is flat.

Fed Chairman Powell double-downed in yesterday’s senate testimony on dispelling speculation that the Federal Open Market Committee may be reconsidering its forward guidance asserting that it will be quite a while longer (years, not months) before any tapering begins of its current level of stimulus. Monetary officials are not concerned about medium-term prospects for inflation or long-term interest and remain resolute in securing and sustaining 2%-plus inflation for a significant span of time. Powell reprises that testimony today before the House Financial Services Committee.

The Fed’s stance contrasts with the Bank of Japan’s. While the BOJ continues to maintain targets of -0.1% on overnight money and zero percent on the 10-year Japanese government bond yield, minutes from recent meetings reveal a split over the balance of pros and cons of prolonging an ultra-easy stance. The recently released minutes from the latest Governing Council Meeting of the European Central Bank expressed rising concern over the euro’s upward drift. Swiss National Bank officials have worried for some time about their franc’s overvalued level.

Two central banks reviewing policy stances today sent contrasting messages.

  • At the Reserve Bank of New Zealand, the Monetary Policy Committee kept a record low 0.25% Official Cash Rate and also maintained existing quantitative stimulative settings. Recent higher inflation, according to a released statement, reflects temporary one-off factors like “higher oil prices, supply disruptions due to trade constraints, the recent suite of supportive fiscal stimulus, and a spending catch-up following the easing of social restrictions.” Officials moreover agreed that “inflation and employment would likely remain below its remit targets over the medium term in the absence of prolonged monetary stimulus.” If necessary, they would not be opposed to considering even more forceful accommodations including the option of a negative interest rate.
  • The National Bank of Kyrgyzstan raised its key central bank interest rate by half a percentage point to a 34-month high of 5.5%. CPI inflation has increased in each of the last five reported months and is now at a six-year, double-digit high.

Fourth-quarter German GDP growth has been revised from 0.1% reported initially based on incomplete data to 0.3% quarter-on-quarter. That resulted in a smaller on-year drop of 3.7% and a contraction in 2020 as a whole of 4.9% (versus 5.3% estimated initially). Prior to the recession caused by pandemic lockdowns, Germany’s economy was already sputtering, with a sequence of quarterly growth results in 2019 of -0.5% in the second quarter of that year followed by +0.3% in 3Q and zero growth in the final quarter.

French business confidence ticked one index point lower to a four-month low reading of 90 in February. The long-term average reading is 100. In February, deterioration in services and retail activities offset an improved and 11-month high score in manufacturing.

The Swiss ZEW expectations index of investor confidence toward that economy advanced 12.3 points from 43.2 in January to an eleven-year high of 55.5.

Czech consumer confidence fell to a 3-month low in February even as business confidence improved further to an 11-month high.

South Korean business confidence also weakened in February, returning to a 2-month low. But in Brazil, consumer confidence climbed 2.2 points.

Malaysian CPI inflation rose sharply in January to a 10-month high on temporary factors and, at -0.2%, remains quite low.

Hong Kong’s 0.2% initially estimated growth rate last quarter was confirmed in today’s fianl estimate. But as a result of very weak growth pre-dating the pandemic, GDP was 3.0% below the level in the final quarter of 2019 and 2.5% under the level of GDP in 4Q 2018.

Mexican retail sales dropped 2.4% in December and by 5.9% from a year earlier.

An overall picture of a crippled world economy was also reflected in today’s report on Danish retail sales, which dropped 5.0% on month in January and 7.6% on year.

One sector benefiting from the pandemic has been residential housing, as stay-at-home restrictions have motivated people to move into larger living spaces. U.S. new home sales in January, for instance, jumped 4.3% last month on top of a 5.5% increase in December. The monthly gain was twice as great as analyst expectations.

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


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