Signs of Economic Recovery and Monetary Policy Patience

June 24, 2021

Overnight dollar movements were mostly down but slight in magnitude. The U.S. currency slid 0.4% against the Mexican peso, 0.3% relative to the New Zealand dollar, 0.2% versus the yen, and 0.1% against the euro, Aussie dollar, loonie and yuan. The dollar also rose 0.5% versus the Turkish lira and 0.3% against sterling. Relative to the DXY weighted index, the dollar’s drop was smaller than 0.1%.

Several European data reports provided more evidence that the Covid recession is being shaken off.

  • The IFO Institute’s German business climate index jumped 2.6 index points to a 31-month high of 101.8 in June. Strength was most pronounced in current conditions, which leaped 3.9 points, but businesses are more hopeful too about the outlook in the second half of this year.
  • Overall French business confidence rose 5 index points in June to 113 (the long-run average is 100). Manufacturing remained elevated but unchanged at 107, while sub-indices for services (113 after 107) and employment (104 after 99) improved strongly.
  • Spanish GDP contracted last quarter to a smaller degree (0.4%) than measured initially.
  • Polish unemployment fell to a 6-month low.
  • Czech consumer confidence and business sentiment in June improved to their best levels in 18 and 31 months, respectively.
  • And Bank of England officials now expect British GDP growth this past quarter to be about 1.5 percentage points faster than assumed in the most recent Monetary Policy Report.

And yet the Bank of England Monetary Policy Committee, which also revised the near-termĀ  path of inflation higher at this week’s review, maintained the view that prices are rising more quickly for transitory reasons and will settled back toward the 2% target next year. Accordingly, the policy interest rate was left at 0.1% by unanimous vote, and the size of the asset-purchase program (GBP 875 of gilts and GBP 20 billion of corporate bonds) was not changed, either. For a second straight meeting, MPC member Haldane preferred a slight tapering, but he is leaving the committee, which otherwise double-downed on a promise not to tighten before clear signs of sufficiently reduced spare capacity emerge to convince officials that the 2% inflation target can be achieved in a sustainable way.

Monetary policy was also reviewed today at Bangko Sentral ng Pilipinas, where the overnight repo rate, which was halved to 2.0% in five incremental moves during 2020, was kept at that record low level. Officials there intend to keep their highly accommodative policy stance for as long as they deem necessary. CPI inflation of 4.5% currently is projected to settle back to 4.0% in the second half of 2021 and to the 3.0% target mid-point next year.

There’s been scant change today in 10-year U.S., German, or Japanese sovereign debt yields, nor in the prices of oil and gold. The 10-year British gilt yield fell two basis points due to the Bank of England’s more dovish-than-expected policy statement.

European stock market gains so far today range from 0.5% in the U.K. to 1.2% in Spain. Stock markets around the Pacific Rim closed unchanged in Japan, China, Singapre and New Zealand but somewhat higher in Hong Kong, South Korea, and India.

U.S. stock futures did not react much to a slew of U.S. data released prior to today’s open. The indication is that share prices will open about 0.5% higher.

The third estimate of U.S. GDP growth in 1Q 2021 of 6.4% at a seasonally adjusted annualized rate (SAAR) matched the first and second estimates. Net exports and inventories exerted a combined drag of 4.2 percentage points on growth, which underscores the dynamism of domestic demand as covid restrictions ebbed.

There were 411k new U.S. jobless insurance claims last week, almost 30k greater than forecast and enough to lift the 4-week moving average for the first time since early April.

U.S. durable goods orders jumped 2.3% in May, about a half percentage point less than anticipated.

The advance estimate of the U.S. trade deficit in May, some $88.11 billion, was almost $3 billion greater than the prior month’s gap.

Price data released Thursday around the world were consistent with recent accelerating trends. In Finland, producer price inflation rose to 11.2% in May from 8.7% in April and -0.8% as recently as January. South African PPI inflation of 7.4% last month represented a 58-month high and more than double last December’s 3.0% year-on-year pace. In Sweden, PPI inflation has swung from -4.4% last November to +7.9% in May. Corporate service price inflation in Japan rose to an 8-month high in May but was still comparatively benign at 1.5%. The U.S. personal consumption price deflator increased 3.7% on quarter in 1Q 2021.

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

Tags: , , , ,


Comments are closed.