Inflation Worries Continue to Rattle Financial Markets

October 1, 2021

The week-long Chinese national holiday began Friday, but elsewhere in the Pacific Rim equities closed down 2.3% in Japan, 2.2% in Taiwan, 2.0% in Australia, 1.7% in South Korea and 1.2% in Singapore. Share prices so far in the U.K., Germany, France, Spain, Italy, and Switzerland have lost 0.6-1.0% on this first trading day of the fourth quarter, and U.S. futures point to around a 0.5% drop at the open.

Ten-year sovereign debt yields are down three basis points in Germany and the U.K. and by a basis point in Japan and the United States.

The dollar is unchanged against the euro, kiwi, and its weighted DXY index. The U.S. currency rose 0.3% and 0.1% overnight relative to the loonie and Swiss franc but dipped 0.1% relative to the yen, Aussie dollar and sterling. Gold is 0.1% softer, and WTI oil has dropped 0.6%.

Most but not all September manufacturing purchasing manager surveys reported thus far today have lower readings than in August. Exceptions were a 6-month high in the Philippines, 5-month highs in Malaysia and India, Russia’s 4-month high, and two-month highs in Sweden and Switzerland.

Euroland‘s revised reading of 58.6 was marginally below the preliminary estimate at a 7-month low and, more importantly, the largest month-to-month drop since the pandemic-ridden month of April 2000. Supply delays that depress growth and lift inflation intensified in many members of the euro area as well as in several other countries.

Japan‘s manufacturing PMI reading, 51.5, was also at a 7-month low. So were the British, Dutch, Italian, and Polish PMI scores. The AIG-compiled Australian PMI dropped to an 11-month low, and Taiwan’s index fell 3.8 points to a 13-month low. Thailand’s 48.9 score was at a 3-month low and below the 50 level separating improving from deteriorating conditions. Vietnam’s 40.2 score matched August’s result, both of which were at the weakest level since April 2020. In Norway, whose manufacturing PMI set a 4-year high in July, fell to a 4-month low by September. The Czech and Turish PMIs slipped to 6- and 3-month lows.

Particular concern was aroused by the Caixin-compiled Chinese PMI of 50.0, which reflected more stagnation after July’s 18-month low of 49.2. China is grappling with a new wave of Covid and financial strains in the housing industry.

Japan’s 7-month low PMI reading contrasted with other better-than-expected data reports released today by Asia’s second biggest economy.

  • The Bank of Japan’s quarterly Tankan survey of corporate conditions and expectations revealed a greater-than-forecast four-point rise in the overall diffusion index for big manufacturers to +18, which is the best score in ten quarters. Big non-manufacturers also surpassed analyst forecasts. Large firms now anticipate a larger 10.1% increase in fixed asset investment this fiscal year than they did at the time of the June survey.
  • Japanese consumer confidence rose 0.9 points to a 19-month high reading of 37.8 in September, having been as low as 29.6 back in January.
  • Analysts had forecast a slight rise in Japan’s jobless rate, which instead remained at a lowly 2.8% in August.

CPI inflation in the euro area accelerated 0.4 percentage points and more than analysts were predicting to 3.4% in September. That’s the most since September 2008, and core consumer price inflation of 1.9% was the most since December of that year. Energy and service-sector prices were 17.4% and 1.7% greater than their year-earlier levels.

German retail sales rebounded by a smaller than expected 1.1% in August following July’s slump of 4.5%. This resulted in an unchanged and low year-on-year increase of 0.4%.

Indonesian CPI inflation accelerated very little in September to a 4-month high of 1.6%.

Polish CPI inflation of 5.8% in September was the most in 243 months.

Three central banks representing Mexico, Colombia, and the Czech Republic raised interest rates on Thursday. Joining that trend, the Central Bank of Jamaica today announced a full percentage point rate hike to 1.5% from 0.5%. The acceleration of price pressure being felt in most countries was not triggered by monetary accommodation during the pandemic but rather reflects a recovery of demand that that’s bumping into unprecedented capacity and parts shortages. While higher interest rates will not directly affect those bottlenecks, central banks particularly in smaller economies and/or ones with histories of inflation troubles are tightening their stances as a pre-emptive move against rising inflation expectations and second-order strains on wages and prices.

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

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