Inflation Surprises Persisting, Central Banks Reacting, and Investors Fretting about What Lies Just Ahead

October 6, 2021

Against the backdrop of  central banks reacting to higher-than-forecast inflation, the dollar continues to be a well-bid currency. The weighted DXY dollar index came within a 0.05-point whisker overnight of matching its 52-week high set last November. The U.S. currency also rose 1.1% against the kiwi and Mexican peso, 0.7% versus the euro and Aussie dollar, 0.5% relative to the loonie and yen, and 0.4% vis-a-vis sterling.

The Fed led the way with its shifting forward guidance that tapering will begin soon and a growing probability that interest rate liftoff will occur sometime next year. Other central banks aren’t waiting. Late last week, the central bank of Jamaica‘s policy rate was increased from 0.5% to 1.5%, the Czech National Bank‘s two-week repo rate was lifted by a greater-than-expected 75 basis points, and central banks rates in Mexico and Colombia were tightened by 25 basis points. Officials at the Central Bank of Romania yesterday increased their policy rate for the first time since 2018, lifting such by 25 basis points to 1.5%, and today has brought news of rate hikes in New Zealand and Iceland.

The Reserve Bank of New Zealand’s Official Cash Rate was doubled to 0.50% in the first increase since June 2014. A statement released by the Monetary Policy Committee there warns that “the economy contracted sharply during the recent nationwide health-related lockdown” but identifies “cause for concern in that inflation expectations appear to have begun rising again” and prioritizes that concern. Regarding growth, officials are counting on covid vaccinations, strong household and corporate balance sheets, a solid terms of trade and expansive fiscal support to deliver a decent economic recovery. The statement projects a further rise in rates, and it would take moves totaling 50 additional basis points to fully reverse the easing done in March 2020.

At the Central Bank of Iceland, the seven-day term deposit rate was increased by 25 basis points to 1.5%. This is the third quarter percentage point tightening since May. Inflation topped 4% at 4.4% last month, and supply chain shortages continue, further risking an upward drift in inflation expectations. While first-half growth underperformed the expectations of central bank officials, they expect that to be made up during the second half of this year.

The stronger dollar is one of several factors weighing on U.S. equities. Futures point to losses at today’s open of at least 1.0%. Long-term interest rates aren’t waiting for central bank rates to move. 10-year sovereign debt yields today are up 5 basis points in Italy, 3 bps in the U.K., and two bps in the United States, Germany, France, and Spain. Investors also fret about U.S. political disunity and the unresolved need to raise the federal government debt ceiling. The United States had slightly more than 1800 more deaths yesterday from Covid. Meanwhile, intensifying financial strains in China’s property market depressed Asian stock markets.

Supply disruptions in general and the rising price of oil in particular are driving inflation upward. The price of oil is in the vicinity of its seven-year high, and although WTI dipped 0.4% overnight, such is within striking distance of $80 per barrel. Gold dipped 0.2% today.

Taiwanese CPI inflation accelerated to a 103-month high of 2.6% in September, and wholesale price inflation of 11.96% remained above 10% for a sixth straight month.

Although South Korean CPI inflation dipped 0.1 percentage point to 2.5% in September, core inflation rose to a 47-month high.

Euroland retail sales volume rebounded only 0.3% in August (about a third of what had been forecast) following a 2.6% tumble in July, and that left sales unchanged from a year earlier. Heady on-year advances such as that of almost 24% in April have all evaporated.

French retail sales fell 1.2% further in August after a 2.3% monthly drop in July. Belgian retail sales bounced 1.6% upward but recorded their largest year-on-year decline (4.9%) in sixteen months. Austrian retail sales were 0.8% lower than in August 2020.

Brazilian retail sales plunged 3.1% in August, their largest monthly decline so far of 2021, and that resulted in a 4.1% slide from the same month a year earlier.

Swedish data reported today included a 3.7% monthly drop of industrial production, its largest decline in 16 months, along with a 2.4% slide in industrial orders after a 1.5% drop the month before. Also, Swedish household spending fell 1.1% on month in August.

German industrial orders sank the most in sixteen months, falling 7.7% in August, with export order diving 9.5% and domestic orders dropping a bit over 5%.

Spanish industrial production posted the smallest year-on-year increase in August (1.8%) in a string of five straight advances.

Euroland construction purchasing managers index rose to 50.0, a 3-month high in September following sub-50 readings in July and August that connoted deterioration. The construction PMIs of 47.2 in Germany and 48.9 in France showed that construction activity in the joint currency area’s two largest economies still hasn’t bottomed.

Britain’s construction PMI survey resulted in a 2.6-point further decline to 52.6 in September, signaling a pronounced loss of momentum since June when the index touched a 24-year high of 66.3.

After spiking to a 90-month high in August of 53.3, Hong Kong’s private sector purchasing managers index fell back to a 2-month low of 51.7 last month.

Finally, ADP’s monthly estimate of U.S. private sector jobs growth produced the biggest increase since June.

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


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