Dollar Ending Pre-Thanksgiving Week on a Strong Note, but Equities and Bond Yields Wobbly

November 19, 2021

The weighted DXY dollar index advanced 0.4% overnight, climbing 0.7% against the euro, 1.2% versus the Turkish lira, 0.5% relative to the Australian dollar, kiwi and sterling, 0.4% vis-a-vis the Canadian dollar but just 0.1% against the Swiss franc, which traditionally thrives when global inflation becomes a concern.

News today on the Covid-19 front has been worrisome. There were over 600 thousand new cases reported worldwide in the past 24-hour period. Europe has been a particular hot spot, compelling moves toward tighter restrictions in the Netherlands, Czech Republic, Greece, Germany and especially Austria, where a national lockdown and vaccine mandate are being tried. New U.S. cases are back above 100k, and their 7-day average of 94k is up to a 5-1/2 week high and 33% above the pace just two weeks ago.

Despite several bits of better-than-forecast activity data such as Tuesday’s U.S. release of retail sales, concerns about the pandemic and inflation are weighing on equities. Bourses in Europe are down 1.7% in Spain and 1.3% in Italy, as well as 0.7% in the U.K. and 0.6% in Spain. U.S. futures point to lower openings in the DJIA and S&P 500. In Asia, by contrast, stock markets closed mixed, with Hong Kong’s Hang Seng index losing 1.1% but gains of 1.3%, 1.1% and 0.5% occurring in Indonesia, China and Japan. Indian markets are closed for a holiday.

The price of WTI oil slumped 3.4% and is below $77 per barrel (compared to a close above $84 as recently as November 9th). And significant drops today can be seen in 10-year sovereign debt yields of 6 basis points in Germany and the U.K. and 5 bps in the United States, France, and Spain. Gold is higher again.

In fiscal developments, a record 8+ hour delaying speech by U.S. House of Representatives Minority Leader McCarthy prevented a vote last night on Biden’s Build Back Better bill. In Japan, the Diet approved a record 56 trillion yen fiscal stimulus.

South Korean producer prices advanced 0.8% on month in October and lifted the 12-month rate of increase to an 18-year high of 8.9% from 7.6% in September, 0.2% last December and -0.3% in November 2020.

German producer prices leaped 3.8% in October following jumps of 1.5% in August and 2.3% in September. An 18.4% PPI increase from October 2020 was the highest on-year rise since November 1951.

European Central Bank President Lagarde again reaffirmed that elevated inflation in the common European currency area (4.1% as of October, most since July 2008) reflects special factors that will fade without policy coaxing and that tightening monetary policy now would be an unwise course.

The sharper-than-forecast rise of inflation almost everywhere and recent further intensification of price pressures in many places has been a big mystery and source of great dispute over the trend’s future evolution. A centrally dynamic role of oil and food prices, as was the case in the 1970s, is magnifying inflationary fears, but there are also anomalies from that earlier bout of runaway prices and wages, and that is the notable exception of Japan this time.

Today’s report of Japanese consumer prices in October revealed a seasonally adjusted monthly drop of both total CPI and the CPI sub-index excluding both fresh food and energy. 0.5% monthly drops in consumer service prices in both August and October flanked a 0.0% change in September. In year-on-year terms, both total CPI and the CPI excluding perishable food were up just 0.1%, and consumer prices excluding fresh food and energy were 0.7% lower than a year earlier. In the 1970s, when oil price shocks in 1974 and 1979 sent overall inflation rocketing upward, Japan was not spared: CPI inflation crested at 24% in the first quarter of 1974 and around 9% in September 1980. Among major industrial economies, Japan has been the most deflationary case, but many other countries flirted during the past ten years with succumbing to what happened in Japan. At a minimum, Japan’s continuing bout of excessively low inflation in 2021 serves as a reminder of the asymmetric problems for policymakers fighting inflation or deflation. Inflation can always be stemmed. Former Fed Chairman Volcker proved that. Deflation is like a black hole. Once an economy is ensnared, the return to low and stable prices becomes extraordinarily elusive, if not impossible. Bear in mind, too, that deflation carries additional risks of low secular growth and equity market weakness (the Nikkei even now is 24% below its record high on the final business day of 1989). With much confusion and disagreement surrounding the outlook for inflation, central bankers are right to approach the problem patiently and not impulsively.

Among other data release highlights today, British retail sales volume rose by a greater-than-forecast 0.8% in October. That was the first monthly rise in a half year, and sales were still 1.3% lower than in October 2020.

Industrial sales in Italy rose in September for a fourth straight month, but the uptick of 0.1% was the smallest in that sequence. Sales were 15.2% higher than a year earlier, nonetheless.

French unemployment failed to slip below 8% last quarter, defying analyst expectations, but instead rose 0.1 percentage point to 8.1% and thus matching a 0ne-year high.

Swedish capacity usage slipped to 90.4% last quarter from a 7-quarter high of 91.1% in 2Q 2021.

Euroland’s current account surplus widened to EUR 19 billion seasonally adjusted in September from EUR 17 billion in August. The seasonally adjusted surplus during the 12 months through September equaled 2.7% of GDP, up from a surplus equal to 1.5% of GDP in the previous twelve-month period.

Canadian retail sales dropped 0.6% in September. Although not as big a setback as anticipated, it was still the largest decline in 4 months and resulted in the smallest 12-month rate of increase (4.8%) since January.

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

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