Data Evidence of Higher Inflation and a Setback in Industrial Production

July 14, 2021

In overnight currency market action, the weighted dollar touched its highest level (92.83) since very early in April but subsequently settled back to 0.1% below its Monday closing level. Net dollar losses so far today are 0.4% versus the Mexican peso, 0.3% relative to sterling and 0.1% versus the yen, euro, loonie and Australian dollar.

The U.S. dollar’s most significant movement overnight has been a 1.0% decline against the New Zealand dollar, which rose following an initial tapering of monetary policy stimulus announced by the Monetary Policy Committee of the Reserve Bank of New Zealand. A released statement after a scheduled policy review, opined

 that, in the absence of any further significant economic shocks, more persistent consumer price inflation pressure is expected to build over time due to rising domestic capacity pressures and growing labor shortages. However, the Committee noted that uncertainties remain as to the pace and magnitude of any pass-through of costs onto medium term inflation, especially given reported under-utilization of labor, modest wage growth, and well anchored inflation expectations. The Committee noted that medium-term inflation and employment would likely remain below its Remit objectives in the absence of some ongoing monetary support. However, the Committee agreed that the level of monetary stimulus could now be reduced to minimize the risk of not meeting its [consumer price and employment] mandate.

Accordingly, RBNZ officials agreed to stop quantitative stimulus via purchases via the Large Scale Asset Purchase Program as of next week, but the Official Cash Rate was left unchanged at 0.25%. This record low level has been in effect since a 75-basis point reduction in the middle of March 2020. Second-quarter CPI data are scheduled to be released in New Zealand on Friday.

Stock markets in the Pacific Rim closed down 0.5% in New Zealand, 1.1% in China, 0.6% in Indonesia, 0.6% in Hong Kong and 0.4% in Japan today. European trading thus far also shows lower share prices. Aside from inflation spiking more sharply than anticipated around the world, investors are reacting to persistent outbreaks of Covid and signs of slower activity in China.

The price of West Texas Intermediate oil has slipped 0.9%, while that of gold is 0.3% firmer.

Ten-year U.S. Treasury and Japanese JGB yields are two and one basis points softer, while the British 10-year gilt yield climbed four basis points overnight.

Following back-to-back 0.6% advances in April and May, British consumer prices jumped by a further 0.5% in June, which was more than twice as much as forecast by analysts and which lifted the 12-month rate of CPI inflation to a 33-month high of 2.5% from 2.1% in May, 1.5% in April, and 0.4% as recently as February. Core CPI inflation rose to 2.3%, and the June rates of producer input and producer output inflation were 9.1% and 4.3%, respectively.

Spain’s monthly rise of consumer prices in June was revised up 0.1 percentage point to 0.5%, resulting in a 0.1 percentage point upward revision in the year-on-year comparison to match May’s 51-month high of 2.7%.

French consumer price inflation of 1.5% last month represents a 17-month high and compares to zero percent last December.

Swedish CPI inflation declined for a second straight month to 1.3% in June from 1.8% in May and 2.2% in April. 1.3% represents a six-month low.

Indian wholesale price inflation, which was only 1.95% last December, topped 10.0% for a third straight time at 12.07% in June.

Singapore real GDP contracted 2.0% in the second quarter but was nonetheless 14.3% greater than in the Covid-depressed second quarter of 2020.

Chinese foreign direct investment was 28.7% higher in the first half of 2021 than the year-earlier level. That’s a smaller on-year advance than 39.9% recorded in the first quarter.

Industrial production in the euro area fell 1.0% in May. Analysts were expecting only a marginal dip, and the year-on-year advance fell back to 20.5% from 39.4% in April. Output recorded monthly contractions in all four largest economies using the euro.

Revised data show a deeper 6.5% contraction of Japanese industrial production in May than the 5.9% decline estimated initially. Shipments and inventories posted monthly drops in May of 5.6% and 1.1%, respectively. So too did industrial capacity (down 0.2%) and capacity utilization (-6.8%).

The Westpac monthly measure of Australian consumer confidence rebounded 1.8% in June but remained 9.2% below April’s 128-month peak.

The Central Bank of Turkey‘s one-week repo rate of 19.0% since a two-percentage point hike in March has been maintained and defended in a hawkish statement after the latest policy review. The tightening four months ago followed three rate increases totaling 875 basis points engineered in the final four months of 2020. Officials continue to cite very elevated inflation and evidence of high inflation expectations and pledge to keep the “policy rate at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is reached.”

In other central banking news, monetary policies in Canada and Chile are also getting reviews today. The Fed Beige Book of regional economic conditions will be released today at 18:00 GMT (14:00 EDT), and Fed Chairman Powell’s semi-annual report to Congress will be out at noon local time. Powell’s begins his traditionally so-called Humphrey-Hawkins testimony today at that time before the House Financial Services Committee and continues tomorrow at 09:30 EDT before the Senate Banking Committee.

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

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