Some Central Bank Developments and a Displeasing U.S. Labor Market Development

July 22, 2021

New U.S. jobless insurance claims last week totaled 419K, 51k greater than in the prior week, roughly 70k above street expectations, and the most in nine weeks. The news dampened the stock market euphoria of recent sessions.

The dollar is little changed from its closing Wednesday levels, with dips of 0.1% against the euro, yen and weighted DXY index and zero net change versus the Chinese yuan or Swiss franc. Sterling has risen 0.3%.

Ten-year U.S. Treasury, German bund and British gilt yields have respectively slipped two, one, and one basis points.

The price of WTI oil is up 0.5%; that of gold is down 0.3%.

Key U.S. equity indices show scant net change. In other stock market action, share prices rose 1.8% in Hong Kong and Indonesia, 1.3% in Singapore, 1.1% in South Korea but just 0.6% in Japan. Continental European stocks so far mostly show moderate gains, while the British Ftse has dipped a bit.

The National Bank of Ukraine delivered a surprise, lifting its policy interest rate by another 50 basis points. There had been earlier increases this year of 50 basis points in March and 100 basis points in April. In contrast, four big reductions in 2020 had reduced the rate from 12.5% to 6.0%. Core inflation has accelerated appreciably in Ukraine, and the overshoot of total CPI inflation there relative to a target range of 4-6% in the medium term has not only exceeded what officials been anticipating but also reflects more than mere temporary developments. Policymakers feel that the rate increases undertaken plus the likelihood of another 50-basis point advance will be needed in order to restore 5% inflation by next year.

At today’s scheduled European Central Bank Governing Council meeting, news was made even though the interest rate structure (a zero percent refinancing rate of zero percent since September 2 the quantitative stimulus. A change in expressed guidance over what to expect from the bank’s policy in the future, officials now say that interest rates will not be raised until the medium-term 2.0% symmetrical inflation target is seen happening well before the policy horizon and accompanied by confidence that inflation will be stabilizing at 2%. What all this means is that it’s entirely possible that a temporary spell of inflation above 2.0% will be tolerated, and that’s a new concession. In discussing the economy, officials do not expect the recent pickup of inflation to endure and foresee subdued inflation continuing in the medium term. Asset purchases are to continue at a pace of around EUR 20 billion per month.

Officials at Bank Indonesia kept their 7-day reverse repo at 3.5% as markets were expecting. Six 25-basis point cuts were implemented previously to that level between February 2020 and February 2021. Indonesia has been experiencing a severe intensification of Covid, and officials project that growth this quarter will be slower than in the first half of 2021 because of fresh restrictions that have become necessary to fight off the pandemic. Projected GDP growth in 2021 was revised downward 0.6 percentage points to a new range of 3.5-4.1%, and such will be accompanied by inflation probably staying within the targeted range of 2-4%.

In other U.S. data news, the Kansas City Fed’s monthly manufacturing index rose 11 points in July to a record high 41, eclipsing the previous high of 40 printed in April. The pace of existing home sales rose to a 3-month high of 5.86 million in June from 5.78 million in May, and the Chicago Fed National Activity index slipped to a 2-month low of 0.09 in June from 0.26 in May.

French business sentiment dipped a point to print at 113 in July, which still represents a solid level and exceeds the pre-pandemic level of 106. Manufacturing rose two index points to a 3-month high of 110 and surpassed expectations. Retail dipped by a point.

Norwegian business confidence continued to improve last quarter, rising to 11.3 from readings of 8.6 in 1Q 3.7% in 4Q 2020 and -9.6 in the year-earlier quarter.

CPI inflation in Hong Kong retreated from a four-month high of 1.0% in May to a 3-month low of 0.7% in June. Core inflation was just 0.4%.

Irish producer price deflation lessened to -5.8% in June from -7.6% in May.

Danish consumer confidence rose to a 2-month high in July, while Dutch and Turkish consumer confidence settled back to 2-month lows. In Belgian consumer sentiment matched June’s reading, which had been the best score since February of 2001.

Having dwelt below zero for roughly two years without interruption, the orders index of the British industrial trends index posted a third reading in the black in July. Scores of +17 in July and May sandwich +19 in June.

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

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