Many Data Released Today as Inflation fears Continue

February 25, 2021

Shortly before today’s release of U.S. economic data, 10-year sovereign debt yields were showing considerable increases (for example, 8 basis points in the United States and Italy, 12 bps in Canada, 6 bps in Spain and the U.K., 5 bps in Germany and France, and 2 basis points in Japan). The trade-weighted dollar had eased 0.5% overnight. U.S. tech stocks had come under renewed downward pressure, resulting in modest losses of other U.S. stocks as well. Equity markets in the Pacific Rim had been mostly up, with South Korea, Japan, Taiwan and Hong Kong closing up 3.5%, 1.7%, 1.5%, and 1.2%. European equities, in contrast, were narrowly mixed. WTI oil had risen 0.3%, while gold’s price was 0.6% lower on the day.

U.S. economic reports mostly beat expectations.

  • New jobless insurance claims fell over 100k to a 12-week low of 730k last week.
  • Durable goods orders extended their string of monthly advances, climbing 3.4% in January and an even moreĀ  impressive 20.2% for non-defense and non-aircraft goods. Total orders for durable goods exceeded their year-earlier level by 4.5%.
  • The revision of fourth-quarter GDP growth amounted to a 0.1 percentage point uptick to 4.1%. That was down sharply from the third-quarter spike and was associated with a 2.4% year-on-year decline.
  • These reports at 12:30 GMT enabled U.S. equity futures to pare their losses but had less influence on the dollar’s value. The overriding uncertainty and concern is that a combination of continuing forceful monetary and fiscal pandemic relief, pent-up demand after an extensive period of social distancing, and rising commodity prices might ignite the biggest inflation upturn seen in many years.

It seems very doubtful that Fed policy would be influenced stronger inflation in the near term. Over the past eight years, consumer price inflation measured by the PCE deflator rose just 1.3% per annum on average. Fed policy is now oriented to securing 2.0% average inflation over a long period of time, and officials have clearly signaled their intent under this symmetrical approach to price stability to secure more than a brief overshoot of the 2.0% target. Even if inflation got as high as 3.0%, it is very unlikely that the full under-shoot of the 2% target from 2013 through 2020 (when the PCE deflator rose 1.2%) will ever be completely neutralized.

Prior to the U.S. data reports, a very plentiful batch of economic indicators were reported from other countries.

Economic sentiment in Euroland increased almost two index points to an 11-month high in February despite many lockdowns. Only the retail sector saw sentiment weaken.

Japan’s index of leading economic indicators for December was revised higher but still represented a 2-month low and was accompanied by a 3-month low in the index of coincident economic indicators.

Business investment in Australia had been forecast to be unchanged last quarter but instead increased by 3.0%, breaking a streak of seven straight quarter-on-quarter drops.

Consumer confidence rose to a 2-month high in Germany, a 5-month high in Austria, a one-year high in Sweden, a 30-month high in Finland, and a 5-month high in Italy but weakened to a 3-month low in Portugal and Greece.

Business sentiment improved to a one-year high in Austria, a 19-month high in Sweden, a 2-month high in Greece, and a 15-month high in Italy but fell to a 3-month low in Denmark, an 8-month low in Portugal, and a 2-month low in Spain and New Zealand.

At the wholesale level especially, inflation has been ramping up but mostly from factors that should prove temporary. In Spain, producer prices jumped 3.4% on month in January and swung from a 12-month 1.5% rate of decline in December to a 0.9% rise in January from a year earlier. South African producer price inflation accelerated half a percentage point to an 11-month high of 3.5% in January. Iceland’s PPI climbed 1.8% last month and accelerated to a year-on-year 6.9% advance.

Propelled by the European Central Bank’s stimulative policy, on-year M3 money growth accelerated to 12.5% in January, and total bank credit was 9.6% greater than a year earlier. Loans to non-financial firms were 7.0% greater than a year earlier, but loans to household grew much more slowly at 3.0%.

Mexican GDP growth last quarter was revised to a smaller drop of 4.3% compared to a year earlier, but for 2020 as a whole the growth rate was negative 8.2%. Moreover, unemployment in that economy increased in January to 4.7%.

In Taiwan, retail sales and industrial production rose in January by 3.6% and 3.0% and were above their year-earlier levels by 3.5% and 18.8%.

The Bank of Korea’s record low 0.5% base rate was maintained after the latest policy review. No surprise there. The rate has been at 0.5% since cuts last year of 50 basis points in March and 25 bps in May. According to a released statement, the economy should experience a modest recovery this year with subdued demand-pull pressure on prices.

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

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