ECB Surprise, a Diplomatic Failure, and Many Price Data Releases

March 10, 2022

In light of risks posed by Russia’s invasion of Ukraine, today’s European Central Bank policy review was not expected to push ahead with its QE exiting strategy, but in fact the pace of the phase-out of asset purchase program bond buying was stepped up: EUR 40 billion will be bought next month, then EUR 30 billion in May and EUR 20 billion in June. Key interest rates including the -0.50% deposit rate, as expected, were left unchanged.

Talks between high Russian and Ukrainian officials today failed to find any common ground to end the brutal military damage. Russian troops have been unable to advance on their goal of controlling cities in Ukraine, but they are inflicting tremendous and indiscriminate damage to civilian life and property. Britain, like the U.S., will ban imports of Russian energy.

The dollar had been higher in early trading by fell abruptly after the ECB decision crossed the wires. On net, the dollar is down 0.2% against the Australian dollar and 0.1% relative to the euro, kiwi and Canadian dollar, as well as on a weighted basis. The dollar has strengthened 1.6% versus the Turkish lira, 0.5% relative to the Mexican peso and 0.1% vis-a-vis the Japanese yen and sterling. Without intervention support, the Russian ruble was as low as 139 per dollar yesterday, but during Russia’s working hours like now, officials artificially support their currency back to a 116-117 per dollar rate of exchange. Russia’s stock exchange remains shut.

Stock markets around the Pacific Rim closed up 3.9% in Japan, 2.2% in South Korea, 2.5% in Taiwan, 1.5% in India, 1.3% in Hong Kong, 1.2% in China, and 1.1% in Australia. But the pattern of three steps down and one step up in Europe resumed, with markets there just prior to the release of U.S. consumer price data show losses today of 2.8% in Germany, 3.1% in Italy, 2.5% in France and 1.4% in Great Britain.

Ten-year sovereign debt yields leaped 20 basis points in Italy, 10 bps in France, 9 bps in Spain, and 8 bps in Germany. There also have been increases of 3 bps in Japan and 2 basis points in the United States.

WTI oil and gold prices rose 3.8% and 1.0%, respectively.

Just In: U.S. inflation in February of 7.9%, although matching market expectations, resulted from a a 4-month high monthly consumer price increase of 0.8% and represents the highest pace since January 1982 when the federal funds rate was hovering between 13% and 14.5% despite a year-old recession at the time. A 25.6% year-on-year upsurge in energy prices still doesn’t embody the affect of the war in Ukraine, and food price inflation matched the overall CPI rate of 7.9%. The 12-month increase in service sector consumer prices accelerated 0.3 percentage points further to 4.4%.

Other price news reported today showed

  • A 9.3% year-on-year advance in Japanese domestic producer prices, most since May 1985, and a 34% year-on-year climb in imported producer prices.
  • Greek CPI inflation of 7.2% in February was at its highest in 302 months and 8.5 percentage point above the -1.3% CPI inflation rate in February 2021.
  • Irish CPI inflation rose 0.6 percentage points further to a 265-month high of 5.6% in February. A year earlier in February 2021, Ireland experienced negative 0.4% CPI inflation.
  • Portuguese CPI inflation accelerated 0.9 percentage points to a 124-month high in February.
  • Czech CPI inflation last month of 11.1% after 9.9% in January was at a 284-month high.
  • Danish CPI inflation had risen from 0.6% in February 2021 to a 386-month high of 4.8% last month.
  • Dutch CPI inflation dipped to 6.2% in February from a 479-month high of 6.4% in January.
  • Egyptian CPI inflation reached a 32-month high of 8.8% last month.
  • Norwegian consumer prices rose 1.1% on month and 3.7% on year in February versus 3.2% in January, while producer prices in Norway shot up 3.4% on month and 53.2% on year last month.
  • Italian producer prices soared 9.7% on month and accelerated 10.3 percentage points to a 32.9% 12-month rate of increase in January.

Compared to a year earlier, industrial production in January had increased 13.9% in Austria and 7.1% in Belgium but dipped 0.2% in Greece. Factory output in South Africa was 2.9% higher that month. Indonesian retail sales had advanced 15.2%, the most in nine months. And Brazilian retail sales had fallen 1.9%, the least in a streak of six consecutive year-on-year declines.

Consumer confidence in Thailand fell to a five-month low last month.

Australian building permits sank 27.9% in January.

The National Bank of Serbia‘s policy interest rate was kept at 1.0%, a record low that has been unchanged since a 25-basis point cut in December 2020 culminated 125 basis points of easing that year. Serbian officials have found other ways to tighten monetary conditions in recent months including another increase revealed today in the average weighted reverse repo auction rate and other actions to drain liquidity. A statement from the Executive Board explains that “developments in the international environment call for special caution” and notes that “core inflation, which is influenced the most by monetary policy measures, equaled 4.1% y-o-y and was well below headline inflation, thanks to the preserved relative stability of the exchange rate even during the pandemic. Under the latest, February medium-term projection, inflation should start declining from March onwards and continue to slow towards the target midpoint until the end of the projection horizon.”

This week’s meeting of the European Governing Council coincided with updated growth and CPI inflation forecasts. Growth in 2022 has been bumped down to 3.7% from 4.2% projected back in December and a forecast of 4.6% made last September. CPI inflation is now seen averaging 5.1% in 2022, more than double the medium-term target and representing a substantial upward revision from forecasts of 3.2% made three months ago and 1.7% at the time of last September’s policy review. Projected inflation next year is now put still above target at 2.1% compared to forecasts of 1.8% made in December and 1.5% made in September. Today’s statement concedes that price inflation has become more widespread,near-term price risks lie to the upside, core inflation is above target, and energy prices are likely to stay high for longer than expected previously. The labor market is improving, but officials caution that “fiscal and monetary support remain critical, especially in this difficult geopolitical situation.” Forward guidance hasn’t changed regarding the key policy interest rates:

New U.S. jobless claims last week were 11k above the figure in the prior week, and their 4-week average of 231.25k was also at a 2-week high.

In the first half hour of U.S. equity trading today, the DOW, S&P 500, and Nasdaq indices lost 0.6%, 1.0%, and 1.3%, respectively.

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

 

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