A Turn for the Worse on Several Fronts Sends Equities Sharply Lower Around the World
December 20, 2021
The highly infectious Omicron Variant of Covid 19 is threatening to overwhelm hospitals and forcing authorities in many places to reimpose tighter restrictions against social gathering. Pfizer’s Covid vaccine trial on kids aged 2-5 did not result in an immunity rise as had been expected, which creates a childcare crisis and will likely prevent many women with toddlers from returning to work. The U.S. infection and death numbers related to Covid over the past week surpassed daily averages of 133k and 1.29k.
The depressive economic effects of earlier waves of the pandemic was greatly mitigated by fiscal and monetary stimulus, but much higher-than-expected inflation now is removing that counterweight. Democratic West Virginia Senator Joe Manchin gave gave a thumbs-down to the Build Back Better legislation, which almost certainly means it will not become law. The lack of this legislation will result in an even larger tightening of fiscal policy than had been assumed.
Many central banks around the world have now begun to lift interest rates, several having done so numerous times and sharply overall. Rate lift-off at the Federal Reserve has not begun, but the FOMC last week laid out an accelerated schedule of bond purchase tapering, and a speech Friday by FRS Governor Waller suggested that lift-off of the federal funds target rate is possible by spring:
The economy is set to continue growing very strongly through at least the first half of next year, and I expect employment to keep growing. With the unemployment rate at 4.2 percent in November, I believe we are very close to meeting the FOMC’s maximum-employment goal. For inflation, as I said earlier, the next few months will be crucial in determining whether price increases will begin to moderate, as I still expect in my baseline outlook. However, I will be closely watching indicators of inflation expectations for signs that consumers and investors have come to expect high inflation well into the future, a development that could signal that the moderation in inflation I expect will not be coming soon. So, by choosing to speed up our reductions in asset purchases, the FOMC is providing flexibility for other adjustments to monetary policy, if needed, as early as spring to accommodate changes in the economic outlook. Omicron, as I said earlier, could slow the recovery or exacerbate inflation pressures, so we will have to be ready in the coming weeks to adjust as needed.
Price news reported overnight did nothing to allay inflation fears.
- Portuguese producer prices jumped 1.6% in November, resulting in a record high 18.7% 12-month rate of increase. Portugal’s PPI, in contrast, had tumbled 4.0% from December 2019 to December 2020.
- Polish producer price inflation accelerated 1.2 percentage points to a 306-month high of 13.2% in November.
- Georgian PPI inflation rose to a 128-month high of 17.2% last month.
China’s is one of the many governments to react quickly to the threat posed by the Omicron Variant, restricting travel and imposing other draconian steps against the infection. Chinese economic data already had been reflecting softer consumer spending in the face of social constraints, and authorities at the People’s Bank of China today cut interest rates for the first time since April 2020. The shift toward a more accommodative monetary policy was highly incremental, however. The 1-year loan prime rate was cut just five basis points to 3.80%, which was a smaller decline than those of 10 basis points in February 2020 and 20 bps two months later. Moreover, the 5-year loan prime rate was not cut at all; such remains at 4.65%.
Central bankers that do not appear to be taking inflation seriously do so at their own risk. Turkey is the most fragrant example of such disregard, and the Turkish lira dropped overnight by as much as 8.4% to a new record low of 18.0184 per USD and is currently hovering just above that level.
All three major U.S. stock market indices have dropped at least 1.5% so far today. Asian markets closed with losses of 2.1% in Japan, 1.9% in Hong Kong, 1.2% in Singapore, 1.1% in China, and 0.8% in Taiwan and Indonesia. India’s Sensex index has so far lost 2.1%, and in Europe, share prices thus far have fallen 1.8% in Germany, 1.7% in Italy, and 1.0% in France and Spain.
The weighted dollar index earlier in overseas trading today rose to within 0.25% of its 52-week high but presently shows a net decline from Friday of 0.2%. The greenback has risen 0.4% relative to the loonie and 0.1% relative to sterling but shows declines of 0.6% versus the peso, 0.5% vis-a-vis the euro, 0.4% against the Swiss franc, and 0.2% versus the Japanese yen.
Worries about future global demand sent the price of WTI oil diving 5.0% today, and gold fell by 0.5%.
Overnight movement in 10-year sovereign debt yields has been minimal, by contrast.
Omicron presents a new cloud over the attitude of households to spend. Belgian consumer confidence fell five index points to an 8-month low reading of minus 4 in December, and the Westpac consumer sentiment measure for Australia slumped to a 5-quarter low of 99.1 in 4Q 2021 from 102.7 in 3Q and 107.1 in the second quarter.
Euroland’s current account surplus narrowed to EUR 20.5 billion in October from EUR 26.9 billion in September and EUR 31.0 billion in October 2020. In seasonally adjusted terms, the surplus remained steady at September’s two month high of EUR 18.0 billion.
The orders component of Britain’s industrial trends survey for December printed at 24, not far beneath November’s record high of 26.
On-year GDP growth slowed three percentage points last quarter to 2.7% in Ukraine and by 19.8 percentage points to 9.1% in Georgia.
Great Britain’s Rightmove house price index posted a second straight monthly decline this month, but it’s year-on-year increase remained unchanged at 6.3%.
Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Chris Waller, Joe Manchin, Omicron, Peoples Bank of China, Turkish lira
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