Inflation Up, Unemployment Down, and a Beige Book Report that Won’t Impede Fed Tapering

December 2, 2021

In overnight market developments, the price of WTI oil plunged over 4% to a 3-1/2 month low of $62.42 per barrel following the cartel’s decision to retain production increases that are to take effect next month, but that drop has been almost entirely reversed as the price moved back above $65.

The dollar fell 0.4% against sterling, 0.2% versus the euro and Swissie, and 0.1% vis-a-vis the Australian and New Zealand dollars and well as on a weighted basis. The dollar is unchanged against the loonie and yen. The foreign exchange  market outlier today has been a 3% appreciation of the dollar against the Turkish lira, which has been crippled by monetary policy management that lacks credibility.

Equities fell in Asia (e.g. Japan’s Nikkei lost 0.7%) and Europe with the Dax currently down by 1.3%, but U.S. stocks attempted to rally in early trading. This happened yesterday, but an initial rise of more than 500 points was transformed into a loss of over 300  points in the Dow by the end of the session.

The ten-year U.S. Treasury yield has risen three basis points in contrast to overnight drops of 3 bps in the comparable German bund and 2 bps in the 10-year British gilt yield.

Inflation reports continue to out-distance bearish expectations. For example, November producer prices in the euro area leaped 5.4% on month and by a record 21.9% on year, up from 16.1% in September, 13.4% in August and 10.3% at midyear. South Korean consumer price inflation accelerated half a percentage point in November to a ten-year high of 3.7%, beating street forecasts of 3.1%. The Fed Beige Book released yesterday afternoon characterized price pressure in many FRS Districts during October and early November as “robust.”

New U.S. jobless insurance claims last week totaled a smaller-than-anticipated 222k. The four-week average of such claims has dropped to 238.75k from 285.25k in the previous four weeks through October 30 and 344.75k in the four weeks through October 2nd. In Europe, too, unemployment has been shrinking. From a crest of 8.6% in August-September 2020, such dropped to 8.2% last January, 7.6% by July, then 7.5% in August, 7.4% in September, and 7.3% in October according to today’s release for that month.

In other data developments reported Thursday,

  • Japanese consumer confidence in November matched October’s 29-month high.
  • Business confidence in Thailand improved to a 9-month high in November.
  • Swiss retail sales rose 0.7% in October. That was the third straight monthly increase but resulted in a smaller 1.2% year-on-year advance.
  • Brazilian GDP dipped modestly by 0.4% in the second quarter and by a further 0.1% in 3Q, which qualifies as a quick and dirty recession. On-year growth in South America’s largest economy slowed from a record 12.3% in 2Q to 4.0% last quarter.
  • South Korean GDP rose 0.3% on quarter and 4.0% on year in 3Q 2021. Both changes were smaller than those in the second quarter.
  • Austrian GDP growth last quarter was revised up half a percentage point to 3.8%, resulting in a larger 5.7% year-on-year increase versus 4.8% reported initially.

According to the aforementioned Fed Beige Book, which breaks down U.S. economic trends by region, growth in the latest period was split among the 12 districts half and half between modest in Boston, NY, Philly, St. Louis, Richmond and Cleveland and moderate as characterized for the Districts of San Francisco, Chicago, Minneapolis, K.C., and Atlanta. The Dallas Fed District earned a solid growth distinction. Overall, demand trended strongly in the period, but labor shortages and supply chain disruptions dampened U.S. growth while fueling inflation. All in all, there’s nothing in the report to discourage Fed officials from considering a faster decline in monthly bond  purchases when they meet later this month. With  other major central banks showing greater caution against becoming less accommodative, the dollar retains considerable market appeal.

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

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