Escalating Financial and Political Chaos in Ukraine and Russia, and Rest of World Feeling Pain, Too
February 28, 2022
Ukrainian and Russian talks in Belarus are unlikely to defuse the military conflict.
Russian President Putin seeks to replace Ukraine’s government and has insinuated that he may use nuclear weapons if Nato doesn’t back off.
In this high stakes game game of chicken, Nato allies seek to decapitate the Russian ruble and financial markets and thereby force a truce before that happens. After initially not including not banning Russia from SWIFT accessibility, NATO added that sanction to its broadening economic restraints on Russia.
At one point overnight, the ruble had plunged about 40% to 120 per dollar. In response the Central Bank of Russia, which in response to rising inflation had lifted its policy rate by 425 basis points in 2021 and another 100 basis points earlier this month, cranked such up 1050 basis points from 9.5% to 20.0% today. Officials also imposed currency restrictions and capital controls. In response the ruble recovered to 98.8 at present, but that still represents a net crippling daily tumble of around 15%.
One big possible sanction that has not yet been invoked is the possibility of banning Nato energy imports from Russia.
Pac Rim equity markets were not affected by these latest developments in the Russian-Nato conflict over Ukraine. Share prices closed up 0.8% in South Korea, 1.0% in Indonesia, 0.7% in India and Australia, 0.3% in Taiwan and China and 0.2% in Japan. But European share prices are down over 1.0% in the U.K., Spain and Germany and by more than 2.0% in France and Italy. U.S. stocks also fell immediately at the open.
The stampede out of risky assets depressed 10-year sovereign debt yields by 5, 4, and 2 basis points in the United States, Germany and Japan.
The price of West Texas Intermediate oil leaped 4.0%. The price of a Bitcoin is 4.5% higher, and gold firmed, too.
The weighed dollar only 0.2% stronger but overnight came close to its 52-week high. In a highly volatile session, the dollar shows gains of 0.5% against the euro, 0.3% relative to the loonie but declines of 0.7% against the Swiss franc and 0.1% vis-a-vis the Japanese yen. Being the last day of month, market participants are also dealing with a barrage of reported economic data around the world.
The preliminary estimated U.S. trade deficit in January of $107.63 billion represents another record monthly high and was almost 30% wider than the January 2021 deficit.
The Chicago regional purchasing managers index slumped 8.9 points in February to an 18-month low of 56.3.
A 1.3% drop in Japanese industrial production last month was twice as much as forecast, and resulted in the first year-on-year drop (-0.9%) since October. A 1.9% drop in January retail sales was the second monthly decrease in a row, but the level of sales exceeded its year-earlier level by 1.6%. Japanese housing starts were only 2.1% higher in January than a year earlier, marking the smallest 12-month rate of increase in ten months.
After slumping 4.4% in December, Australian retail sales last month rebounded much more (1.8%) than had been anticipated.
Swiss GDP growth slowed sharply last quarter to 0.3%. On-year Swiss growth equaled 3.7% in both the quarter and 2021 as a whole. Real GDP had contracted 2.4% in 2020. Swiss retail sales posted a fifth straight monthly drop in January but were 18.9% greater than in January 2021. The KOF-compiled Swiss leading index dropped to a four-year low in February.
Danish GDP expanded 1.1% on quarter and 4.4% on year in 4Q. GDP climbed 4.1% in 2021 after falling 2.1% in 2020.
Finnish GDP increased by 0.6% in 4Q, 2.9% from the final quarter of 2020, and 3.3% in 2021 as a whole.
Icelandic GDP rose 2.2% last quarter and 4.4% in year-on-year terms. GDP grew 3.7% on average in 2021.
Polish GDP growth of 1.7% from 3Q and 7.3% from 4Q 2020 was unrevised.
Swedish GDP expanded 1.1% last quarter, a downward revision from 1.4% estimated earlier, and year-on-year growth was revised to 5.2% from 6.2%.
Portuguese GDP advanced 1.6% last quarter, trimming the year-on-year pace to 3.8% from 4.5% in 3Q and 11.2% in 2Q.
Turkish GDP growth of 1.5% last quarter was the slowest in four quarters. GDP climbed 11% in 2021 after growth of 1.8% in 2020 and 0.9% in 2019.
Price data continue to command special market attention. Accelerating trends in many cases are making a mockery of the initial widely held consensus that post-pandemic inflation would be a short-lived phenomenon:
- Sri Lankan consumer price inflation jumped 0.9 percentage points to a 159-month high of 15.1%.
- Producer prices in Singapore were 22.7% greater last month than a year earlier, a 2-month high and a far swing from negative 4.7% PPI inflation recorded in January 2021.
- Greek producer prices soared 4.0% on month and by a record high of 31.6% on year in January.
- Spanish CPI inflation of 7.4% in February was up from 6.1% in January and the most in 401 months going all the way back to July 1989. Even when taking out highly volatile food and energy, core CPI was at a 160-month high.
- Canadian PPI inflation accelerated a full percentage point to 16.9% in January but remained below last year’s crest of 17.3% in May and June.
- Malaysian PPI inflation slowed to a 10-month low of 9.2%, and Vietnamese CPI inflation of only 1.4% in February was a half percentage point lower than in January and at an 11-month low.
Canada’s current account unexpectedly swung into the red last quarter for the first time in a year. The deficit of C$ 797 million despite a C$ 2.373 billion goods and services trade surplus occurred because of deficit of C$ 2.0 billion in net investment income and C$ 966 billion in net transfer payments.The quarter’s deficit trimmed the 2021 surplus to C$ 1.553 billion after a deficit of C$ 39.4 billion in 2020.
Today’s huge increase in the Central Bank of Russia’s policy interest rate from 9.5% to a 20-year high of 20.0% was the second increase this month following a percentage point high in the 11th. In a wide-ranging statement, Governor Nabiullina opens with acknowledging
The conditions for the Russian economy have altered dramatically. The new sanctions imposed by foreign states have entailed a considerable increase in the ruble exchange rate and limited the opportunities for Russia to use its gold and foreign currency reserves.
The Governor then lists numerous actions taken today intended to “to maintain financial and price stability, support the Russian financial sector, and protect the welfare of citizens and the economy in general.”
Russia was not the only central bank to raise its policy interest rate today. The other country involved was Russia’s ally, Belarus, where the National Bank’s refinancing rate was hiked 275 basis points to 12.0%, its highest level since mid-October 2017. On-year CPI inflation of 10.4% in Belarus of 10.4% is roughly double the central bank’s medium-term target. The policy rate hike today follows a single 75-basis point increase engineered in April 2021. The rate earlier in the pandemic had been at a record low of 7.5%.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Canadian current account, Central Bank of Russia, National Bank of Belarus, Putin, U.S. trade deficit