Case Keeps Rising for Early Rise in Fed’s Interest Rate

January 7, 2022

The case is growing for an FOMC rate hike in March. From a monetary policy standpoint, Fed officials are expected to pay more attention to faster-than-expected wage growth and lower-than-forecast unemployment last month than to December’s 199k rise in jobs, which was only half as much as predicted. For one thing, employment growth in October-November was revised 161k higher than reported earlier. On-year growth in average hourly earnings had been expected to slow at  least half a percentage point (ppt) but dipped just 0.1 ppt, and the 0.6% monthly rise exceeded those of 0.4% in each of the prior two months. Unemployment dropped to to 3.9%, down from the 14.8% April 2020 peak and less than a half percentage point above the pre-pandemic February 2020 level.

The dollar traded 0.3% lower on a weighted basis overnight and against the loonie and sterling. The greenback lost 0.2% versus the yen and 0.4% relative to the euro. Nonetheless, the dollar is only 1% south of its 52-week high.

The interest rate-sensitive Nasdaq lost an additional 0.4% in the first hour of U.S. equity trading, but both the S&P and DOW are pretty steady. Japan’s Nikkei closed unchanged. Equities rose 1.8% in Hong Kong and 1.2% today in South Korea but fell 1% in Taiwan and 0.2% in China. The German Dax and British Ftse have fallen 0.8% and risen 0.2%, respectively.

The 10-year Treasury yield extended its climb by four basis points to 1.76%. The rise of 10-year sovereign debt yields in this first week of 2022 has been 25 basis points in the United States, 19 bps in Great Britain, 13 bps in Germany, and 7 basis points in Japan.

Friday was an active day from a data release standpoint even before the release at 13:30 GMT of the Labor Department’s employment situation figures for last month. CPI inflation in the euro area didn’t drop as analysts were widely expecting but instead advanced 0.4% on month and by a record 5.0% on year. Retail sales volume in the joint currency area had been expected to drop in November but instead went up 1.0% on month and a six-month high of 7.8% compared to the same month a year earlier.

A 2.3-point drop in Euroland’s December economic sentiment index to a 7-month low also was also reported today, notwithstanding record highs in the industrial and construction sectors. Consumer confidence, service sector sentiment, and retail confidence dropped to 9-, 8- and 7-month lows, and the employment expectations gauge posted its first month-on-month decline since January 2021. While the Fed has been rotating from its labor market mandate toward restoring price stability, ECB officials thus far have gone out of their way to quell speculation that they are inclined to follow suit soon.

Among less industrialized economies, central banks by and large have not waited for the Fed’s lead. Three days ago, the National Bank of Poland‘s rate was raised by another half percentage point to 2.25%, augmenting 165 basis points of increase implemented in the final quarter of 2021. Then late yesterday, the Central Reserve Bank of Peru  lifted its key rate by 50 basis points to 3.0%, bringing the cumulative increase since August to 275 basis points in what officials characterize as a still-ongoing appropriate normalization of its policy stance. CPI inflation has risen to a 13-year high in Peru and over 4 percentage points above the target midpoint. Economic recovery is proceeding at a comparatively fast pace.

The case of Japan serves warning that excessive monetary restraint can be even more consequentially costly than excessive accommodation. Japan was viewed in the 1980s the way China is perceived now. Back then, Japanese officials defined a recession differently than anyone else, namely any dip in growth below a +3.0% threshold. With inflation reaching 4% in just two months, the Bank of Japan engineered a very steep rise of long- and short-term Japanese interest rates in the early 1990s that seeded the deflationary psychology that still plagues that economy three decades later. Data released today in Japan revealed that real household income fell 1.2% on month and 1.3% on year in November. Average cash earnings, a measure of wage inflation, was zero percent in November, ending a streak of non-negative year-on-year growth since March.

Before Omicron surfaced, French retail sales increased 1.1% in November after back-to-back monthly 0.1% dips in September and October. Industrial production, in contrast, fell 0.4% on month and by 0.5% on year in November, and such remained 5% weaker than its pre-pandemic level.

Italian CPI inflation of 3.9% last month was the most in 160 months.

Mexican consumer prices climbed 0.4% in December and to a 419-month year-on-year inflation high of 7.36%.

Greek business and consumer confidence fell last month to 3- and 2-month lows. Austrian consumer sentiment fell to a 10-month low last month. Spanish business confidence, by contrast, reached an 18-month high.

54.7k jobs were created in December on top of a 154k surge the month before. But unlike the U.S. labor market report, jobs growth was accompanied by a 0.3 percentage point downtick in wage growth to 2.7%. Canadian unemployment slid just 0.1 percentage point and, at 5.9%, is two full percentage points higher than the U.S. pace.

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


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