Cloudy Picture: Inflation Still Elevated but Delta Variant Poses Growth Risk

August 18, 2021

Central bankers and private investors are continuing to balance the pressures of elevated inflation on the one hand but a less certain strong recovery on the other. This has made for choppy markets.

  • Overnight movements in the dollar were narrowly mixed, with net dips of 0.2% against sterling and 0.1% relative to the euro, loonie, yuan, peso and DXY weighted index but upticks of 0.3% against New Zealand’s kiwi, 0.2% versus the yen and 0.1% vis-a-vis the Swiss franc and Australian dollar.
  • Equity indices in the United States show scant net change thus far. In the Pacific Rim, share prices rose 1.1% in China, 1.0% in Taiwan, 0.6% in Japan, and 0.5% in South Korea and Hong Kong. The Paris Cac  is down 0.8%, but exchanges in Spain and Italy show advances of 0.5% and 0.3%.
  • Ten-year sovereign debt yields slipped a basis point in Germany and Great Britain but rose a basis point in the United States and Japan.
  • The price of gold is unchanged. That of WTI oil has risen 0.7%.

After ending quantitative stimulus via bond purchases last month and facing above-target inflation, officials at the Reserve Bank of New Zealand were expected to engineer a hike of the Official Cash Rate for the first time since a 25-basis point increase to 3.50% in July 2014. Instead, the OCR was left at the record low of 0.25% due to concerns about the outlook for growth after recent imposition of tighter restraints to contain the spread of Covid. The only OCR change in 2020 was a 75-basis point cut to its present level in March of that year.

Consumer price inflation in the euro area last month was confirmed at the preliminary estimate of 2.2%, which represents a 33-month high. However, both the total CPI (-0.1%) and the core underlying price measure (-0.4%) posted month-on-month declines, and the 12-month increase in the core index fell to a 3-month low of only 0.7%. The main inflationary impetus continues to come from energy, up 2.0% versus June and by 14.3% compared to July 2020.

Canadian CPI inflation rose 0.6% on month in July, twice what analysts were anticipating, and that lifted on-year inflation to a 122-month high of 3.7% from 3.1% in June and 0.7% at the end of 2020.

British price data released this Wednesday were mixed. An unchanged CPI in July versus an expected 0.3% monthly advance, cut year-on-year inflation to by half a percentage point to a 3-month low of 2.0%. However, producer output inflation in July accelerated 0.4 percentage points to 4.9%, its highest point since December 2011, and producer input price inflation backed up 0.2 percentage points to a 2-month high of 9.9%.

Portuguese producer price inflation of 10.2% in July was 2.3 percentage points greater than in June and its fastest pace in 251 months.

Quarter-on-quarter increases of New Zealand producer output an input prices in 2Q of 2.6% and 3.0% were each greater than the rises in the first quarter.

Despite a smaller-than-forecast 0.4% second quarter-over-first quarter rise in Australia’s wage price index, its 12-month rate of increase accelerated 0.2 percentage points to a one-year high  of 1.7%.

South African consumer prices jumped 1.1% on month in July, the most in a year, but on-year inflation subsided for a second straight time to a 3-month low of 4.6% from 4.9% in June and a 30-month high of 5.2% in May.

Among other data reported this Wednesday,

U.S. housing starts fell 7.0% in July to a 3-month low and were only 2.5% above the level in July 2020. Mortgage applications tumbled 3.9% last week, the most in a month.

Construction output in the euro area fell for a third straight month, sinking 1.7% in June, and the second quarter’s average increase of 0.5% merely matched the first quarter’s increase. Construction was only 2.8% greater than in June 2020.

Japan’s customs clearance trade surplus of JPY 441 billion in July represented a favorable swing from a deficit of JPY 15 billion a year earlier, and the January-July deficit of JPY 172 billion was substantially smaller than the JPY 1.5 trillion deficit a year earlier. However, the seasonally adjusted July 2021 surplus was just JPY 53 billion, and monthly growth in both exports (0.0%) and imports (-1.6%) were depressed by Covid.

Japanese core machinery orders sank 1.5% in June , their first drop in four months. Export demand slumped 10%.

South African retail sales posted a diminished 0.6% monthly rise in June, and the year-on-year increase of 10.4% was down from 16.3% in May and 95.7% in April.

a 5.0% unemployment rate in Hong Kong last month was the lowest in 16 months and down from this year’s peak of 7.2% in February.

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

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