Dollar Up, Equities and Bond Yields Lower, and U.S. Capitol on Alert

March 4, 2021

March 4th was the day U.S. presidents were inaugurated until the 1930s, and there’s internet chatter suggesting a possible reprise of the January 6th attack on the Capitol. Widely anticipated geopolitical traumas rarely seem to happen as planned. A notable exception occurred July 1, 1997, the day that Hong Kong reverted to Chinese rule. That switch of sovereignty went off as planned and without disturbing the USD/HKD fixed exchange rate that had been observed since 1983. By coincidence, however, the Thai baht devalued that same day, setting off a chain reaction that became the Asian debt crisis.

The dominant current driving factor in world financial markets has been the rise of U.S. long-term interest rates. The 30-year fixed mortgage rate jumped 18 basis points last week, and the 10-year Treasury yield has soared 57 basis points to 1.46% since mid-December.

Higher U.S. rates have lifted long-term rates in other economies in their wake and are pulling equities lower, especially in the tech sector. Although British, German and U.S. 10-year sovereign debt yields are down 4, 3, and 2 basis points so far today, those in Australia and New Zealand leaped 10 and 11 basis points.

The price of West Texas Intermediate crude oil has elevated 0.2% ahead of today’s meeting of OPEC+ oil ministers. Gold is 0.1% firmer. Investors await a speech at noon today by Fed Chairman Powell before a WSJ-sponsored jobs conference. Final details of the U.S. pandemic relief package are likely to be hammered out and approved very soon.

Equity markets in the Pacific Rim sank today by 2.2% in Hong Kong, 2.1% in Japan and China, 1.4% in Indonesia, 1.3% in South Korea, and 1.2% in India. European market declines range up to 0.9% in the U.K., and U.S. futures are down but by a lesser amount.

The trade-weighted dollar has climbed 0.2% this morning ahead of several U.S. data releases. Overnight bilateral dollar changes include rises of 0.4% in the yen to an 8-month high, 0.3% relative to the euro, and 0.1% vis-a-vis the Aussie dollar, Canadian dollar and sterling. The Turkish lira was depressed to a 7-week low by yesterday’s Turkish February price reports that put CPI inflation at a 19-month high of 15.6% and PPI inflation at a 21-month high of 27.1%.

Above-target inflation in Ukraine inspired officials at the National Bank of Ukraine to hike their policy interest rate by 50 basis points to 6.5%. The move was unexpected and the first tightening since a 50-basis point advance to 18.0% in September 2018. Officials had eased five times by a total of 450 basis points in 2019 and four times by a total of 750 basis points last year. A released statement by monetary officials notes that CPI inflation in Ukraine moved above the 4-6% target range in January and likely rose further last month. The tightening is intended to prevent price pressures that thus far have been concentrated in food and fuel from becoming entrenched in a wider spectrum of goods and services and to stabilize expected inflation. Officials foresee the peak occurring around the middle of this year and inflation thereafter falling gradually and into its target range during the first half of 2022. They are prepared to raise the interest rate further if that doesn’t seem to be happening. One inflationary concern is the lagged impacted of Ukraine’s currency depreciation last year. Ukraine joins Mexico, Zambia, and Kyrgyzstan in a small circle of central banks that have raised interest rates so far this year.

Monetary reviews occurred today in Malaysia and Sri Lanka, and neither of those resulted in a change of policy settings. Poland’s central bank yesterday did likewise, leaving its rate at 0.1% where such has been since a cut last May that culminated 140 bps of easing in 2020.

Bank Negara Malaysia’s overnight policy rate has been at 1.75% since last July when a 25-basis point cut culminated four easing in 2020 totaling 125 basis points. The economy is recovering, and inflation remains low but is likely to increase due to higher oil prices.

The Central Bank of Sri Lanka’s policy interest rate is presently 4.5% but was cut five times in 2020 by a total of 250 basis points. The last of those cuts was also the steepest — 100 basis points in July. The central bank wants to be assured that economic recovery is assured and that currently subdued inflation is edging higher. Getting past the pandemic will be needed. Tourism arrivals in Sri Lanka were 98.8% lower in January-February than a year earlier.

Retail sales volume plunged 5.9% on month and 6.4% on year in Euroland during January. Both drops far surpassed expectations and were the largest in nine months. The euro area’s jobless rate printed at 8.1% in January for a third straight month. Although the lowest level in seven months, such remains 0.7 percentage points higher than in January 2020.

Britain’s construction purchasing managers index recovered 4.1 index points to a 4-month high of 53.3 in February. The U.K., which seemingly had lost its way since the Brexit referendum of June 2016, has managed to vaccinate the population more efficiently than most countries, and finally Brexit-related uncertainty has been clarified.

Euroland’s construction PMI went up only 0.9 points to a 2-month sub-50 high of 45.0. The improvement was limited by Germany, whose national construction PMI reflected harsh February weather and consequently plunged 7.6 index points to 41.0.

Consumer confidence in Japan improved from a 5-month low of 29.6 in January to a one-year high of 33.8 last month, reflecting optimism over the roll-out of vaccines.

Quarterly growth in South Korea slowed from 2.1% in 3Q 2020 to 1.2% in the next quarter, and that resulted in the first year with average negative growth (-1.0%) in 22 years. South Korean CPI inflation nearly doubled to 1.1% in February after dropping from 1.2% in December to 0.6% in January.

Australian retail sales rose 0.5% on month and 10.7% on year in January. That month, the economy also recorded a record trade surplus of A$ 10.142 billion, with exports at a 10-month high.

New U.S. jobless insurance claims last week of 745k were close to expectations but still 3.4 times greater than in the year-earlier week and 9k above the prior week’s total.

U.S. labor productivity plunged 4.2% at an annualized rate between the third and fourth quarters of 2020. Productivity rose 2.5% on average in 2020 after gains of 1.8% in 2019 and 1.4% in 2018. Unit labor costs soared 6.0% last quarter and 3.8% on average in 2020.

U.S. factory orders data will be released later today.

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

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