Continuing Market Reverberations from FOMC Minutes

January 6, 2022

FOMC minutes released yesterday afternoon, which served notice that the federal funds rate is likely to rise further in 2022 than implied earlier and that central bank balance sheet reduction will commence sooner too, have  helped allay concerns that monetary officials are treating the threat of inflation too lightly. Given this change, investors on the other hand will also need to weigh the probability of a recession in the next year or two more heavily. In addition to less accommodative Fed policy, President Biden is unlikely to get nearly as much fiscal stimulus as sought, pandemic trends have become more worrisome, and Chinese growth faces greater downside risk than imagined previously.

The dollar is little changed overnight, gaining 0.4-0.6%  against commodity-sensitive currencies such as the kiwi, Aussie dollar, and Turkish lira but moving no more than 0.1% relative to sthe euro, Swissie, and sterling. Dollar/yen slid back 0.2% from 5-year highs against the Japanese yen but climbed 0.4% versus the Chinese yuan.

There’s been a big further rise in ten-year sovereign debt yields overnight, amounting to eight basis points in Australia and Italy, seven basis points in Hong Kong, six bps in the U.K. and New Zealand, five bps in France, Portugal and Spain, and four basis points in the United States, Germany, and Japan.

An appreciation that Fed officials are taking inflation more seriously than feared depressed the price of gold by 1.6%, even as weather disruptions in North America drive the price of WTI oil up 1.9%.

Equity markets lost 2.9% in Japan, 2.7% in Australia, 1.2% in New Zealand, 1.1% in South Korea and 1.0% in India. Stocks in Germany, France and Italy are down more than 1.0%, too, while U.S. futures show interest rate-sensitive tech stocks getting hammered further, but other sectors possibly stabilizing after yesterday’s post-FOMC sharp losses.

In the context of the globally shared nature of this year’s much steeper and far more prolonged rise of inflation than had been foretold, the considerable criticism directed at Fed policy up to this point had been somewhat unfair and presumes greater central bank control over inflation in the short run than is in fact possible. More elevated inflation reports arrived today:

  • Producer price inflation in Euroland rose by a larger-than-forecast 1.8 percentage points to 23.7% in November, the most ever and more than twice the 10.3% pace at mid-2021. If there was a silver lining, it’s that the monthly 1.8% jump from October was less than increases of 2.7% and then 5.4% in the prior two months.
  • German consumer price inflation accelerated to 5.3% in December, highest since mid-1992, and the CPI’s monthly 0.5% advance matched the largest increase since July. Food price inflation accelerated 1.5 percentage points to 6.0%. German inflation last January was only 1.0%.
  • Colombian CPI inflation advanced from 1.6% last January to 3.6% at mid-2021, 5.3% by November and a near five-year peak of 5.6% last month.
  • Taiwanese CPI inflation last year intensified from minus 0.2% in January to +2.6% by yearend. Wholesale prices in Taiwan were 12.3% above their year-earlier levels.
  • In authoritarian Hungary, PPI inflation rose another 3.1 percentage points to 21.6%, more than three times above its level last January.

The cloud of Omicron depressed several purchasing manager surveys reported this Thursday.

  • In the U.K., which has had a particularly nasty bout of this variant, the composite and service sector PMI readings in December of 53.6 each were at 9- and 10-month lows, and the services index, which is more exposed to social distancing, fell below the manufacturing gauge for the first time since May.
  • Australia’s composite PMI slipped below November’s 5-month high to a 2-month low of 54.9 in December. The services index also dipped to a 2-month low.
  • Japanese service and composite PMI’s fell from multi-year highs in November to 2-month lows of 52.1 and 52.3 last month.
  • China‘s service-sector and composite PMIs for December printed at a 2-month high of 53.1 and a 5-month high of 53.0, but business confidence regarding a year from now slumped to a 15-month low.
  • Euroland’s construction sector purchasing managers index slipped 0.4 points to a two-month low in December of 52.9 despite a 22-month high in Germany’s construction PMI to 48.2, which being below 50 implied continuing, albeit slower, contraction in that sector. The French index slid to a 2-month low and was barely above the 50 threshold, while Italy’s 64.4 reading almost matched November’s record high of 65.5.

Released U.S. data were mixed. New jobless insurance claims remained historically few last week at 207k, which in addition to yesterday’s considerably better-than-forecast estimate of private employment growth last month (807k) sets up tomorrow’s monthly report on the labor market situation for very strong figures. So while U.S. domestic demand appears very robust, much of such is being met by foreign suppliers. The goods and services trade deficit in November was reported at $80.2 billion, almost matching September’s record gap of $81.4 billion. Looking at just the merchandise deficit in goods trade, the leakage ballooned to $98.99 billion, and the January-November total was just $3.8 billion shy of $1.0 trillion.

U.S. factory orders and the ISM non-manufacturing purchasing managers survey will be released shortly.

Meantime, Germany reported a stellar 3.7% rise in factory orders during November (almost twice expectations), thanks to an 8% jump in export orders and a more-than-respectable 2.5% increase in domestic demand. But this report followed a very week October and yielded only a 1.3% rise of overall orders versus November 2020.

Consistent with recession in South America’s largest economy, Brazilian industrial production fell 0.2% on month and 4.4% on year in November.

Counterbalancing the U.S. trade report, Canada’s trade surplus swelled to its largest monthly level since 2008 during November, when such reached C$ 3.13 billion.

There were 2.6 million more cases of Covid-19 discovered around the world in the past 24 hours. U.S. hospitalizations are running 58% above their level two weeks ago. The U.S. death rate, though holding fairly steady, exceeds 1.3k daily and has accrued since the start of the pandemic to 830 thousand people.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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