Stock Markets Drop in Wake of Week’s Spotlight on Central Banks and World Inflation

December 17, 2021

Other factors weighing on investor appetite for riskier assets include Omicron, whose true threat to public health and economic growth remains uncertain, and congressional paralysis over President Biden’s Build Back Better Bill.

Two more central banks hiked their interest rates. The Bank of Mexico‘s increase late Thursday of 50 basis points to 5.5% reflected a deterioration in that country’s inflation risk balance and brings the cumulative increase since June to 150 basis points.

The Central Bank of Russia has raced even harder to overtake inflation, which has climbed to 8.4% from 4.9% at the end of 2020. The latest increase by Russian monetary officials announced today is a full percentage point to 8.5% in size. This was the sixth hike since March, the total of which has equaled 425 basis points. If the economy evolves next year as laid out in the central bank’s baseline scenario, additional rate hikes appear probable.

The final review this year  of Japanese monetary policy also wrapped up on Friday. Although the key interest rates of the Bank of Japan were not changed – the short-term policy rate stays at negative 0.1% and the 10-year JGB yield at “around zero percent” – a decision was made to begin throttling back central bank purchases of corporate bonds. Officials said Japan’s economy is starting to pick up but overall remains in a severe situation, and core CPI ” has been at around 0 percent, mainly due to a rise in energy prices, despite being affected by a reduction in mobile phone charges. Meanwhile, inflation expectations have picked up.”

In U.S. trading today, the DOW, S&P 500 and Nasdaq have all tumbled more than 1.0%. Losses also exceeded that threshold in Japan, China, Hong Kong, India, Germany, France, Spain and Italy.

As a perceived safe haven, the dollar has benefited from the latest wave of risk aversion, rising overnight by 0.2% in weighted terms and by even more if not for a modest downtick relative to the Japanese yen.

The downward spiral of the Turkish lira has intensified since that country’s central bank defied fast-rising domestic inflation and cut its interest rate thsi week by another full percentage point. At today’s low of 17.2140 per U.S. dollar, the lira had plunged 8.8%, although that incremental loss was subsequently trimmed somewhat.

The move out  of stocks today has seen 10-year sovereign debt yields drop three basis points in both Germany and the United States. Meanwhile, prices for WTI oil and gold has declined 1.9% and 0.6% thus far today.

The German business climate index compiled by the IFO Institute each month fell 1.9 index points to a ten-month low of 94.7 in December. Commenting on the data that also revealed 11-month and 7-month lows in expectations and current conditions, IFO officials particularly singled out deterioration in pandemic containment and said that the “German economy isn’t getting any presents” this Christmas. In a sectoral breakdown of the data, services, trade and construction sub-indices were at their weakest levels in 8, 10, and 5 months, while manufacturing was comparatively insulated and reached to a 2-month high.

The final accounting of consumer price inflation in the euro area confirmed a 4.9% year-on-year advance in November, up from 4.1% in October and -0.3% in November 2020. Between November 2020 and last month, CPI inflation swung from -0.7% to +6.0% in Germany, -0.3% to +3.9% in Italy, -0.8% to +5.5% in Spain and -2.1% to +4.0% in Greece, while rising from 0.2% to 3.4% in France, 0.2% to 7.1% in Belgium, and from 0.7% to 5.9% in the Netherlands.

A brighter spot in Euroland’s economy was highlighted in today’s release of construction output, which rose 1.6% in October after gaining 1.0% in September. Compared to a year earlier, construction was 4.4% higher in October versus only 0.9% higher on average in the third quarter.

British retail sales volume rose by a larger-than-forecast 1.4% in November after a 1.1% increase in October. There had been five successive monthly drops previously, but the 4.7% 12-month rate of rise represents a 5-month  high.

Business confidence in New Zealand fell to a 16-month low in December.

EU Council talks continued today.

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

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