Bitcoin Disaster, Equities Fall Again, and Mixed Inflation News

May 19, 2021

The Bitcoin fallout from Elon Musk’s reversal on Tesla-for-bitcoin transactions has been huge. The cryptocurrency dropped over 20% overnight and at its intra-day low was showing a 43% loss over the past five weeks to its lowest level in 11 weeks.

Wednesday’s been a difficult day for equity trading as well, with losses in the Pacific Rim of 1.9% in Australia, 1.3% in Indonesia and Japan, 1.2% in Singapore and New Zealand but just 0.5% in South Korea. Losses so far in the U.K., Germany, France and Italy range from 1.4% to 1.8%, and U.S. stock futures point to a further drop of more than 1.0% at the open.

America’s appeal as an island of safety lifted the dollar by 0.3% on a weighted basis and by more against several developing economy currencies. The dollar advanced 1.7% against the Turkish lira, 0.8% versus the kiwi, and 0.7% relative to the Australian money. The U.S. currency also recovered 0.4% against the Swiss franc, 0.2% versus the yen, loonie, yuan, peso, and sterling, and 0.1% against the euro.

The recent price strength of oil suffered a setback from reports of progress between Iranian and U.S. negotiators toward a nuclear treaty. West Texas Intermediate oil fell 2.0%. Other commodity prices also fell such as gold (down 0.8% overnight).

Uncertainty over the duration and eventual magnitude of the recent rise of inflation remains the dominant economic theme driving financial market activity especially ahead of this afternoon’s scheduled release of FOMC minutes. In the meantime, there have been conflicting signals elsewhere today regarding inflation expectations and concerns.

The Central Bank of Iceland today became the first Western European central bank authority to raise its interest rate. During 2020, the monetary policy committee had slashed its policy rate from 3.0% to 0.75% in five incremental cuts. But a released statement after today’s scheduled meeting showed that officials are taking current 8-year consumer price inflation high of 4.6% very seriously.

Inflationary pressures appear to be widespread, as underlying inflation is broadly similar to headline inflation. This is due to a number of factors, including the depreciation of the króna in 2020 and steep rises in wages and house prices. As a result, it is necessary to raise the Bank’s interest rates in order to ensure that inflation expectations are anchored to the target.

In other countries, the energy-driven pick-up of inflation has not spilled over dramatically into other sectors. In Euroland, for instance, the energy component of the CPI with a weight of nearly 10% of the index, swung from a 9.7% on-year drop in April 2020 to +10.4% last month and lifted total CPI inflation to a two-year high of 1.6%. But core inflation slowed for a third straight month to 0.7% in April from 0.9% in March and 1.4% in January.

Likewise British CPI inflation jumped 0.8 percentage points to 1.3% in April, but core CPI inflation accelerated much more slowly and, at 1.3%, was below its pace last December-January.

Australia’s wage cost index recorded a year-on-year advance of 1.5% last quarter, up just 0.1 percentage point from the pace in the previous two quarters and down from 2.1% in the first quarter of 2020.

Austrian consumer price inflation in April of 1.9% was a tad lower than March’s reading of 2.0%.

Canadian CPI inflation spiked to 3.4% in April, most since May 2011 and up from 2.2% in March and 1.1% in February. Part of the jump reflected a month-on-month drop in consumer prices in April 2020, which dropped out of the year-on-year comparison.

Similar base month effects were reflected in South Africa’s April CPI pace of 4.4%, up from 3.2% in March and the highest in 14 months.

New Zealand producer output and input prices posted quarter-on-quarter increases in 1Q of 1.2% and 2.1%.

Other data reported today underscored the uneven pace of recovery, which is to be expected amid continuing uncertainty related to the Covid-19 pandemic.

  • South African retail sales sank 3.7% on month and 2.5% on year in April.
  • Australian consumer confidence in May fell 4.8% below April’s 11-year high.
  • The monthly rise of Japanese industrial production in March was revised 0.5% below its preliminary estimate and left average output in the first quarter still 1.0% below its year-earlier level.  After plunging 12.8% in 2020, capacity utilization recorded a year-on-year rise of 1.3% last quarter.

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

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