Optimism Bumps Up that Recovery Can Withstand Covid, Higher Inflation, and Central Bank Tightening

October 14, 2021

Equities have experienced a better session, with higher closes in Asia of 1.5% in Japan and South Korea and 1.4% in Indonesia. Hong Kong was closed for the Chung Yeung festival. The German Dax, Paris Cac and British Ftse are respectively up 0.9%, 1.0% and 0.7%, and U.S. futures point to similar gains.

The move into riskier assets was evident to in lower 10-year sovereign debt yields, down four basis points in Germany, France, Italy, Spain and the Netherlands, off two bps in the U.K. and down one basis point in Japan and the United States.

The U.S. dollar, which benefits in times of risk aversion, settled back overnight by  0.5% against the Australian, Canadian and New Zealand dollars, 0.4% relative to sterling, 0.3% vis-a-vis the Swiss franc and 0.2% against the euro and in the weighted DXY index. Not all currencies strengthened against the dollar, which also climbed 0.6% against the Turkish lira, 0.3% versus the Mexican peso and 0.1% relative to the Japanese yen and Chinese yuan.

The Turkish lira touched an all-time low of 9.1887 per USD intra-day after President Ergodan firmed three Central Bank of Turkey policymakers.

More evidence of inflation’s persistence around the world were reported this Thursday.

  • The price of WTI oil advanced 1.1% to more than $81 per barrel. Higher oil and natural gas prices have been a major driver behind the elevation of inflation.
  • Chinese producer prices increased 1.2% on month and 10.7% on year in September, which was the largest 12-month rate of increase since at least the autumn of 1996. This overshadowed a 0.1 percentage point downtick in CPI inflation to 0.7%.
  • Indian wholesale price inflation slid to a 6-month low in September but at 10.66% remained in double digits.
  • Finnish CPI inflation of 2.5% last month was at a 107-month high.
  • Irish CPI inflation, which had been negative 0.4% as recently as February, accelerated another 0.9 percentage points to 3.7% in September.
  • Spanish CPI inflation in September was confirmed at 4.0%, and core inflation there reached a 15-month high.
  • The combined PPI/import price index of Switzerland was 4.5% above its year-earlier level, constituting the most inflation in 158 months. Import prices were up 8.1% on year, and domestic producer price inflation held steady at 2.9%.
  • Swedish CPI inflation rose 0.4 percentage points to a 118-month high of 2.5% last month.
  • And in South Korea, import and export price inflation last month of 26.8% and 20.2% were the most inflationary in 154 and 151 months, respectively.
  • Just In: U.S. producer price inflation rose 0.3 percentage points to 8.6%, most since at least November 2010.  Core PPI inflation edged up 0.1 percentage point to 6.8%.

More central banks have reacted to the rise in inflationary risks. Late Wednesday came news from the Central Bank of Chile of a unanimously agreed greater-than-projected 125-basis point high in its policy interest rate. This move was the third recent hike following increases of 25 basis points in July and 75 bps at the end of August and puts the rate level at its highest since August 2019. CPI inflation in Chile has risen to 5.3%, a higher level than officials were assuming at the time of their previous tightening and associated with core inflation of 4.2%. The medium-term target of 3.0% is thus imperiled from being achieved within the forecast horizon, so officials are rushing to reestablish policy neutrality sooner than imagined earlier.

Today, the Monetary Authority of Singapore, which targets the exchange rate rather than an interest rate and which reviews its stance only semi-annually, surprised analysts by raising the slope of the S-dollar’s allowed trading band. The band had been lowered in April 2020 as Covid hit to a slope of zero percent. Officials did not change the width or mid-point of the new band but is encouraging some currency appreciation by restablishing a band with some slope. Band slope had also been flat from April 2016 through April 2018, when like now it was raised.

Officials at the Central Bank of Sri Lanka did not lift its 5.0% policy rate further today following a 50-basis point hike at the prior review in August but is leaving the door open to future increases. “The Monetary Board was of the view that the current level of policy interest rates is appropriate. The Central Bank will continue to monitor domestic and global macroeconomic and financial market developments and stand ready to take appropriate measures, as and when necessary, with the aim of maintaining inflation in the desired range under the flexible inflation targeting framework in the medium term, while supporting and sustaining the economic recovery.” During the first seven months of 2020, the policy rate had been progressively lowered from 7.0% to 4.5%. Sri Lankan CPI inflation last month settled back to 5.7% from 6.0% in August, but core inflation rose.

Investor sentiment got a boost yesterday from updated IMF forecast that although embodying downward revisions still projected global GDP growth of 5.9% this year followed by 4.9% in 2022. Corporate earnings remain robust for the most part.

New U.S. jobless insurance claims fell more sharply than assumed last week to 293K from 329k in the prior week and 364k in the week before that. New claims last week, the four-week average of new claims, and total continuing claims in the week of October 2 were each the fewest since the week of March 14, 2020.

The drop in Japanese industrial production in August has been revised from 3.2% to 3.6%. In contrast to a 19.9% on-year rise in the second quarter, August’s 12-month rate of increase was 8.8%. Capacity usage dropped 3.9% in August but was 9.6% above its year-earlier level.

The British house price balance index compiled by the Royal Institute of Chartered Surveyors printed at a 6-month low in September of 68%, down from 82% in both May and June.

Australia’s jobless rate edged up 0.1 percentage point to 4.6% in September still close to August’s 141-month low. The report also revealed a large 138k decline in employment and a 0.7 percentage point decline in labor market participation.

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

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