Tough Week for Central Bank Credibility

March 19, 2021

At Wednesday’s press conference, Fed Chairman Powell tried to assuage investor concerns about inflation and the possibility of an earlier Fed tightening than indicated in the central bank’s forward guidance. Markets didn’t quite believe the dovish tone and drove the 10-year Treasury yield from 1.63% then to a high yesterday of 1.76%. Tech stocks in particular got hit hard too, as did oil which dropped 7%.

The Bank of Japan’s Policy Board met yesterday and today for five hours eighteen minutes and characterized a few policy modifications afterward as mere tweaks to make the policy framework more effective and more sustainable but fundamentally unchanged. The credibility of the Bank of Japan’s Quantitative and Qualitative Policy with Yield Control has been doubted for some time now due to pressure put on the profitability of financial institutions and the lack of progress toward achieving the 2% inflation target. There had been rumors prior to this week’s Board meeting that a more flexible approach to anchoring long-term interest rates and the program of asset buying might in fact be the start of an exit strategy from the 4-1/2 year experiment of QQE with yield control.

Share prices in Japan fell 1.4% today. In other Asian stock markets, losses were incurred of 1.7% in China, 1.4% in Hong Kong, 1.3% in Taiwan, and 0.9% in South Korea. In Europe stock markets are down so far 1.4% in the U.K., 1.1% in Spain, and 0.7% in Germany and France. In those cases, the main problem has been Covid-related. Cases are rising, and some new lockdowns have had to be imposed.

New cases of Covid and daily deaths have also picked up in the United States, but here there is a race against time because vaccinations are proceeding as an ever-quickening pace. In futures trading, U.S. stocks and the dollar are little changed today; the dollar has posted a mere 0.1% uptick against its trade-weighted index. The 10-year Treasury yield has settled back to 1.68%, in between yesterday’s high and the level when the FOMC was meeting in mid-week. Compared to yesterday’s close, the 10-year U.S. Treasury yield is down three basis points, as are comparable yields in Germany, Spain, France and the Netherlands.

Japanese total and core consumer prices rose 0.1% on month and 0.4% on year during February to respective 4- and 5-month highs. But a 0.9% advance in energy, which is not excluded from Japan’s measure of core inflation, was a big factor. The seasonally adjusted month-on-month core CPI index was 0.0% for the fourth time in five months.

Australian retail sales had been projected to post a small advance in February but instead fell 1.1%, marking their second significant decline in three months sandwiching a mere 0.3% uptick in January and underscoring the continuing drag on retail of concern about social gathering.

Coronavirus fear and government responses to the pandemic also weighed on Canadian retail sales lately. Such had dropped 3.4% in December and fell 1.1% further in January, which trimmed the 12-month rate of increase to 1.3% from 2.8% in December and 7.5% in November.

British consumer confidence in March rose four index points to a 13-month high but remained weak historically at -19 versus -7 in February 2020. Fiscal relief against the pandemic caused public sector borrowing in the U.K. to balloon out to GBP 279 billion in the first eleven months of the current fiscal year from GBP 50.6 billion one year earlier.

Polish retail sales were 2.7% weaker in February than a year earlier.

Italian construction output dropped 2.8% in November-January against the prior three months’ average level and was 1.5% lower in January than a year earlier.

German producer price inflation jumped 1.0 percentage point to a 21-month high of 1.9% in February (1.4% when excluding the energy component).

The Central Bank of Russia became the third monetary authority this week to raise its key interest rate in response to accelerating and above-target inflation, but unlike the tighenings in Brazil and Turkey which were merely larger than anticipated, Russia’s hike to 4.5% from 4.25% had not been expected. A statement from the Board of Directors, moreover, asserts that “the Bank of Russia holds open the prospect of further increases in the key rate at its upcoming meetings.” CPI¬† inflation last month of 5.7% in Russia was at a 51-month high and well above the target of 4%. Indicators of expected inflation are also rising, and economic recovery is broadening and deepening, aided by fiscal support. In addition to Russia, Turkey, and Brazil, central banks in Kyrgyzstan, Ukraine, and Zambia have also raised there interest rates this quarter.

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

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