Softer Business Confidence, A Rate Hike in Iceland, and Awaiting Clarification of Fed Policy Plans

August 25, 2021

The Jackson Hole annual central banker conference begins tomorrow at which investors hope to glean greater clarification of the Fed’s exit strategy.

The Delta Variant’s wave of higher coronavirus infections has cast a shadow over how aggressively Federal Reserve officials will taper quantitative monetary stimulus. Global infections are closing in on the 215 million level. Yesterday saw over 150k newly identified U.S. infections and over 1,100 deaths.

Covid’s immediate economic effect has been felt in business confidence. The German IFO Institute’s monthly gauge of that economy’s business climate slipped 1.3 index points to a 3-month low in August, marking the second drop in a row despite a further improvement in current conditions to around a two-year high. Business expectations fell to a 6-month low, with manufacturing continuing to struggle with supply bottlenecks and services and trade activities dampened by Covid fears. The construction sector index, in contrast, climbed to its best level in over a year.

Business confidence fell also in August to a 3-month low in Belgium and a 5-month low in South Korea. The Swiss ZEW economic expectations index likewise tumbled to a 17-month low of -7.8 from a +42.8 reading in the prior month and was the first sub-zero score since March 2020.

Brazilian consumer confidence dipped from an 8-month high of 82.2 in July to a 2-month low of 81.8 this month. A separate Brazilian indicator released today was its current account, which swung into deficit in July for the first time since March. The deficit’s size of $1.584 billion was considerably above expectations and the $0.650 billion shortfall posted in July 2020.

Mexican GDP growth last quarter was unrevised at 1.5% on quarter and marginally stronger than reported initially at 19.6% on a year-on-year basis, which was the most on record but preceded by a two-year uninterrupted string of on-year declines including -18.7% over the four quarters ending in 2Q 2020. Mexico’s monthly economic activity index fell 0.9% in June, however, and that nearly halved its year-on-year increase to 13.3%.

U.S. durable goods orders dipped 0.1% in July but exceeded the year-earlier total by 16.7%.

Malaysian CPI inflation slowed to a 4-month low of 2.2% in July, which was less than half the recent peak of 4.7% in April.

But Spanish PPI inflation remained on a high plateau in July, recording a 12-month increase of 15.3% after ones of 15.4% in June and 15.2% in May.

In financial market action,

  • The dollar climbed by 0.3% overnight against the yen and loonie, 0.2% versus sterling and the weighted DXY index, and 0.1% relative to the euro, Swiss franc, Australian dollar, Chinese yuan, and Mexican peso.
  • U.S. share prices are barely changed from Tuesday closing levels. Japan’s Nikkei closed unchanged, and the German Dax is a mere 0.1% softer. Equities rose 1.4% in Taiwan, 0.7% in China and 0.4% in Australia.
  • Prices for WTI oil and Comex gold are respectively up 0.6% and down 0.6% on the day.
  • European 10-year sovereign debt yields advanced today by six basis points in Italy, four bps in France, and three bps apiece in Germany and the U.K.. But the 10-year U.S. Treasury yield is flat, and its Japanese counterpart only rose one basis point.

The Central Bank of Iceland’s policy interest rate was increased another 25 basis points to 1.25%. An initial hike of similar size had been engineered earlier this year in May. During the opening five months of 2020, the rate had been reduced by a total of 225 basis points to 0.75%. Iceland is the only Western European central bank thus far to have raised its benchmark interest rate. Above-target inflation has been the driving force behind the policy reversal. Also, projected economic growth in 2021 was revised upward to 4.1%. According to released statement today,

Inflation measured 4.4% in Q2/2021 but was 4.3% in July. Overall
inflationary pressures appear to be subsiding, particularly according to
underlying inflation, but nevertheless remain relatively high. The rise in
inflation expectations earlier this year seems to be reversing. According
to the Central Bank’s forecast, however, the outlook is for inflation to
ease somewhat more slowly than was projected in May. It is expected
to remain above 4% through the year-end but align with the target in

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

Tags: , ,


Comments are closed.