Stagflation Breezes this Ides of March

March 15, 2022

Concerns that China will pay a price for supporting Russia’s invasion of Ukraine led to a huge rout in the Shanghai equity exchange, which tumbled 5.6% today, as in its vassal Hong Kong, the Hang Seng plunged by a similar 5.7%. Equities also closed down 2.0% in Taiwan, 1.3% in India and 0.7% in Australia. In Europe, the German Dax, British FTSE, and Paris Cac currently show losses of 0.6-0.7% on the day.

U.S. stock markets opened mixed, with the DOW and Nasdaq up about 1.0% but the SPX down around 0.7%.

This month’s highly anticipated meeting of the Federal Reserve Open Market Committee begins today   and will commence interest rate normalization in the United States. Details tomorrow at 14:00 EDT will be accompanied by updated staff forecasts and followed by Chairman Powell’s press conference starting at 14:30 EDT.

After Monday’s upward leap, the 10-year U.S. Treasury yield has settled back five basis points. European 10-year sovereign debt yields are also lower, while the Japanese JGB yield has ticked a basis point higher.

There has been a large 6.6% slide in the price of West Texas Intermediate oil, and gold as slumped 1.9% so far.

The biggest economic surprise of 2021 was the magnitude and persistence of the inflationary express, and such shows few signs of relenting anytime soon.

  • U.S. producer prices in February increased 0.8% on month, sufficient to match January’s 10.0% 12-month rate of rise, which compares with 2.8% in February 2021. A 14.8% on-year rise in gasoline prices doesn’t even reflect the rise after Russian forces rained on Ukraine infrastructure.
  • French CPI inflation last month was confirmed at the initially estimated 3.6%, which represents a 163-month high. Energy price inflation rose 1.2 percentage points to 21.1% in France.
  • Czech CPI inflation rose above the 20% threshold last month to a 361-month high of 21.3% and exceeded expectations.
  • Polish CPI inflation accelerated from 3.2% in February 2021 to 8.5% last month.
  • In Switzerland, the combined producer price/import price index increased 5.8% over the 12-months through February compared to a decrease of 1.1% in the previous twelve months. An on-year drop of 1.7% in import prices in February 2021 was transformed into a 9.8% advance in the year through February 2022. Domestic producer price inflation also swung from the red a year ago to +3.9% last month.
  • Bulgarian CPI inflation of 10.0% in February constituted a 160-month high.
  • Saudi Arabian wholesale price inflation, although at an 11-month low, remained in double digits at 11.5% last month.
  • Australian house price inflation of 23.7% last quarter was at a record high.
  • British labor market figures reported today attest to a continuing tight market. A 3.9% rate of unemployment was at a 2-year low, on-year growth of average weekly earnings of 4.8% was at a 3-month high and matched the year-earlier pace.

In another one of the former Soviet Socialist Republics, officials at the Central Bank of Armenia took more aggressive action to stem above-target inflation. From an pandemic low of 4.25%, their refinancing rate had previously been raised eight times, beginning that normalization in December 2020.  Aside from the initial increase in that sequence, all the others had been either been by 25 or 50 basis points, but today’s move from 8.0% to 9.25% was the largest so far and resulted in the highest rate level in almost 7 years.

Investors are worried that Russian havoc will not only extend the current bout of world inflation but also possibly put a big damper on economic growth. These concerns are reflected in other data reported today.

The German ZEW Institute’s monthly index of investor expectations swung from a 7-month high of +54.3 in February to a two-year low of 39.3 in March. The month to month deterioration was the biggest adverse swing in at least three decades and and accompanied by a negative 21.4 score for the perceived current situation being experience. Such had been as buoyant as +61.0 in March 2021. These scores were for just the German economy but mirrored in the results for all of the euro area, where the ZEW expectations index dived to -38.7 in March from +48.6 in February. Current conditions in Euroland fell 22.5 points to a 9-month low of -21.9.

Brazilian business confidence dipped additionally to a 23-month low in March.

After back-to-back increases of 2.5% in November and 1.3% in December, Euroland industrial production showed zero percent month-on-month growth in January and was 1.3% below its year-earlier level. Output in Greece and Italy recorded monthly declines of 4.1% and 3.4%.

In America, the Empire State manufacturing index slumped to a 22-month low in March of -11.8 from +3.1 in February and +34.3 last September.

Chinese industrial production and retail sales in January-February both exceeded analyst expectations, but unemployment increased by two percentage points for a second straight time to a one-year high of 5.5%.  While the on-year increases of 7.5% and 6.7% in the first two months of 2022 compared favorably with gains of 4.3% and 1.7% in full 2021, such were down from on-year growth of 35.1% and 33.8% in January-February 2021. On-year growth of fixed asset investment in January-February was 12.2% compared to a 4.9% advance in full-2021.

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

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