A Parade of Central Bank Announcements and PMI Releases, Plus Another Strong U.S. Labor Market Indicator

December 16, 2021

The rally late yesterday in U.S. equities carried over into Thursday trading. Share prices rose 2.1% in Japan, 0.8% in China, 0.7% in Taiwan and 0.6% in South Korea. The British, German and French stock markets show gains so far of more than 1.0% today, and the DJIA has gone up by a further 0.6%.

Whereas the 10-year Treasury yield retreated 3 basis points, comparable British gilt and German bund yields today are up by four and two basis points.

The DXY weighted dollar  index retreated 0.4% but remains  above a 96.0 reading. Prices for gold and oil strengthened 1.9% and 1.2% overnight.

The Turkish lira got clobbered, slumping more than 5.0% further after the Central Bank of the Republic of Turkey reduced the one-week repo rate by another 100 basis point to 14%. Under political pressure and in spite of upwardly spiraling  Turkish inflation, there have been four successive full-percentage point cuts since September.

The Bank of England’s nine-person Monetary Policy Committee lifted the bank rate by 15 basis points to 0.25% in an 8-1 decision and indicated that modest further increases will probably be needed in 2022. Today’s move was somewhat controversial insofar as Britain is being hammered by the rapidly spreading Omicron Variant and now undergoing renewed social restrictions to fight the virus.  According to today’s statement, “the labour market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures. Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage.” Today’s step reverses a 15-basis point cut done on March 19, 2020 but not the full 65 basis points of reduction that month.

The European Central Bank Governing Council left its three main interest rates (a zero percent refinancing rate flanked by a deposit rate of -o.50% and an MLR facility rate of 0.25% unchanged but authorized changes in its quantitative stimulus with the net effect of lessening the degree of accommodation. Projected GDP growth was revised upward, and an even larger upward revision was made to the 2022  inflation forecast to 3.2% from 1.7% predicted back in September. Accordingly pandemic emergency asset purchases will diminish next quarter and end after March. APP purchases will be bumped up in the middle two quarters of 2022 but return to current levels afterward. Officials expect a growth slowdown this quarter to be shortlived but assert that “monetary accommodation is still needed – including net purchases under the APP and our forward guidance on interest rates – for inflation to stabilise at our two per cent inflation target over the medium term.”

The Bank of Norway‘s policy interest rate was raised by 25 basis points to 0.50%. An initial 25-basis point hike had been done  in September, and a released statement today suggests that as many as three such moves could happen next year. But “if there is a need for more stringent and protracted containment measures that pull down economic activity through spring next year, further rate hikes may be postponed.”

Swiss National Bank monetary policy was not changed in spite of an upwardly revised CPI inflation forecast of 1.0% next year versus 0.7% projected in the previous policy review three months ago. The key interest rate has been -0.75% since early 2015, and officials “remain willing to intervene in the foreign exchange market as necessary, in order to counter upward pressure on the Swiss franc.”

Three Asian central banks left their policy stances unchanged as well. Bank Indonesia‘s 7-day reverse repo rate has been at 3.5% since a 25-basis point cut in February that followed five such reductions during 2020. Taiwan’s record discount rate of 1.125% since March 2020. Officials at the Central Bank of the Republic of China (Taiwan) remain worried about the possible negative growth impact of Omicron. Similar sentiment was expressed in the statement released by Bangko Sentral ng Pilipinas after officials there kept a record low 2.0% policy interest rate.

Although slightly less than forecast, U.S. industrial  production recorded a decent 0.5% advance in November following a 1.7% jump in October. Output was 5.3% higher than in November 2020, and capacity utilization edged up 0.3 percentage points to 76.8%, its highest  level since 4Q 2019.

U.S. housing starts and building permits in November were above expectations and respectively 11.8% and 3.6% greater than in October.

New jobless insurance claims in the  United States last week rose 24k. However, the 206k level was still historically low, and its four-week average continued to decline. Also, the level of continuing claims fell sharply.

The Philly Fed manufacturing index dropped more sharply than forecast. The KC Fed manufacturing index  was also lower, but the composite KC Fed index stayed unchanged in December.

The IHS-compiled U.S. purchasing manager survey produced preliminary figures showing a one-year  low in manufacturing but only 3-month lows in the services and composite indices. All three measures remained above 56, implying solid expansion.

Euroland’s composite PMI dropped to a 9-month low, and service sector orders were at a 7-month low according to  preliminary findings. The composite measure is at 53.4, with manufacturing printing at a robust 58.0 but services sliding to 53.3. The German composite purchasing managers index was only 50, worst in 19 months and indicating a stagnant trend depressed by services clocking in at 48.4. A fourth wave  of Covid was to blame. France has done better, with a composite PMI at only a 2-month low of 55.6.

French business sentiment slipped to 110 in December from a 113 reading in October despite a one-point uptick in manufacturing. Depressed by Covid, sentiment in the services sector fell 6 index points to 108.

Great Britain’s composite PMI index  sank by a sharp 4.4 points to a 10-month low of 53.2 in December, according to preliminary findings. Omicron hurt the services sector.

Japan’s composite PMI fell 0.7 points to a 2-month low of 51.8. Manufacturing did better than services.

Australia’s composite PMI dropped 0.8 points to a 3-month low of 54.9.

On-year growth  in labor costs in the euro area accelerated to a 3-quarter high of 2.5% in 3Q 2021 from -0.1% in 2Q and 1.5% in the first quarter.

Euroland’s seasonally adjusted trade surplus contracted to EUR 2.4 billion in October from EUR 6.1  billion in September, EUR 9.2 billion in August and EUR 13 billion in July. The unadjusted surplus of EUR 3.6 billion was down from EUR 29.8 billion in October 2020.

Japan’s unadjusted customs trade deficit of JPY 955 billion was the largest deficit since the first month of 2020.

Australian labor market statistics were stellar in November. The jobless rate fell 0.6 percentage ponts to 4.6%, and 366 thousan jobs were created on net.

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

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