Fresh Dose of Moderate Risk Aversion Attributed to Covid Concerns

December 9, 2021

Ten-year sovereign debt yields retreated overnight by four basis points in the Netherlands, Germany, France and Spain, three basis points in the United States and two basis points in Great Britain.

Safe haven demand lifted the U.S. dollar by 0.6% against the Swiss franc and Mexican peso, 0.5% versus the euro and Chinese yuan, 0.4% relative to the Canadian, Australian and New Zealand dollars, and 0.2% vis-a-vis sterling. The dollar also gained 0.9% against the troubled Turkish lira but edged 0.2% downward versus the Japanese yen. The weighted DXY index is 0.4% firmer.

Prices for WTI oil and Comex gold are 1.1% and 0.6% lower.

Stock markets in the Pacific Rim closed with mixed results. Gains of 1.1% in Hong Kong, 1.0% in China, 0.9% in South Korea, 0.6% in Indonesia nad 0.4% in Singapore were counterbalanced by losses of 0.8% in New Zealand, 0.5% in Japan, and 0.3% in Australia. Equity movements in Europe and the United States have been more consistently downward but with only moderate magnitudes.

Covid-related news has not been especially worse. There’s still no evidence that existing vaccines aren’t providing protection against Omicron or that the new variant is more toxic than the Delta Variant. That said, new Covid restrictions have become necessary around Europe, and the U.S. case and death trends are creeping upward.

Another big concern has been inflation, which continues to exceed analyst expectations and that is becoming harder for central bankers to dismiss as a transitory problem that will not require a policy response. Apart from the major central banks, the next tier has already been reacting. On Wednesday, the Central Bank of Brazil’s Selic interest rate was increased 150 basis points and is now at 9.5% versus 2.0% at the start of this year. Also yesterday came news of 50 basis point rate hikes in Poland and Georgia to 1.75% and 10.5%, respectively.

Today, officials at the National Bank of Ukraine chimed in with their fifth rate hike of 2021, a 50-basis point increase to 9.0% that follows 250 basis points of tightening from the four earlier moves. In a released statement, the Executive Board acknowledges a bigger global wave of inflationary pressures and a slower-than-assumed decline of inflation in Ukraine that at 10.3% last month was just 0.7 percentage points south of September’s peak and over five percentage points above the 5% medium-term target, which coincidentally matched the actual inflation rate at the end of 2020. Officials are worried about inflationary expectations creeping higher and do not rule out more hikes in the near future as they try to reimpose in-target price stability.

The National Bank of Serbia, which also reviewed policy today, didn’t raise the record low 1.0% policy interest rate. Four reduction in 2020 between March and December had cut such from 2.25%. A released statement from the NBS reveals that inflation is being watched more closely and has justified keeping the interest rate at 1.0% this long has been possible because stimulus is being trimmed in other ways. “the NBS has been gradually raising the percentage of excess dinar liquidity which it withdraws for a week through reverse repo auctions (repo sales of securities) and the weighted average rate applied at such auctions.”

Irish consumer price inflation, which had been at zero percent as recently as last March, rose 0.2 percentage points further in November to a 245-month high of 5.3%.

Chinese CPI inflation of 2.3% last month represents a 15-month high and was three times greater than September’s 0.7% 12-month rate of  increase.

Chinese PPI inflation surpassed 10% for a third straight month but, at 12.9% in November, was not quite as elevated as 13.5% in October.

Mexican CPI inflation jumped to a 263-month high of 7.37% in November, twice as much as 3.6% recorded just three months earlier.

Japanese business conditions according to the Ministry of Finance’s quarterly survey improved in the fourth quarter but are likely to post a less positive reading among large firms next quarter.

Swiss officials have revised projected GDP growth for 2022 somewhat  lower to 3.0% from 3.4% expected three months ago and also increased the forecast of CPI inflation next year by 0.3 percentage points to 1.1%.

The German current account surplus shrunk to a two-month low of EUR 15.473 billion in October. Traded exports of goods rose 4.1% on month but imports climbed even faster (5.0%). The seasonally adjusted trade surplus in October of EUR 12.5 billion was down from quarterly averages of EUR 14.6 billion per month in 3Q, EUR 13.9 billion in 2Q and EUR 18.0 billion per month in the first quarter of this year.

South African factory output plunged 5.9% on month and 8.9% on year, which was the largest 12-month rate  of decline in 14 months. South Africa’s current account surplus narrowed to a 3-quarter low of EUR 226 billion last quarter, equivalent to 3.6% of GDP.

U.S. new weekly jobless insurance claims fell over 40k  last week to 184k, their lowest weekly total since 182k in the week of September 6, 1969. The four-week average of claims (218.75k) is down from 278.5k in the four weeks through November 6 and 335k in the four weeks through October 9.

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


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