An Historic FOMC Meeting on Tap Amid High Inflation and Some Cautious Optimism about the Pandemic and Diplomatic Efforts for a Russian Cease-Fire
March 16, 2022
The size of today’s initial federal funds rate hike is expected to be 25 basis points. I personally would prefer to see a bolder opening move of 50 basis points, as a symbolic gesture that Fed officials recognize that interest rate lift-off is starting late. But the credibility of forward guidance lies in not whip-sawing investors, and there are many other opportunities (the wording of the FOMC statement, the revised macroeconomic forecasts, Chairman Powell’s initial remarks to the press corps, and how he answers their questions) to signal a whatever-it-takes approach to restoring price stability and not recommitting the monetary policy mistakes made in the 1960s and 1970s.
Stock markets have rallied today on reported continuing rhetorical signals that cease-fire talks between Russian and Ukrainian negotiators are making progress. Optimism was buoyed further by a pledge made by the Xi government in China that financial markets will be supported and not allowed to become disorderly as a result of Western sanctions and uneasiness over the recent Covid wave hitting mainland China and Hong Kong.
Share prices rallied 9.1% in Hong Kong, their biggest daily gain in over 13 years, and closed up 3.5% in Shanghai, 1.9% in India, 1.7% in Singapore, 1.6% in Japan, 1.4% in South Korea, and 1.1% in Australia. In Europe, the Paris Cac and German Dax are up over 2.5%. So is Italy’s stock exchange, and equities in the U.K., Spain and U.S. futures show a rise of more than 1.0%.
The Omicron wave continues to recede in many countries, enabling restrictions against socially intensive activities to continue being relaxed. Seven-day averages of U.S. Covid-19 cases, hospitalizations, and deaths are down 46%, 44%, and 36% from two weeks ago, but the number of deaths yesterday (1,508) and cumulatively since the start of the pandemic (965,434) underscore the continuing uncertainty surrounding this challenge. The worldwide number of Covid cases to date is just around 38 million shy of half a billion people, and the global death count is now closer to 6.1 million and 6.0 million.
The dollar lost ground overnight. One depressant was lessening hot-money flows into perceived safe havens, but a second possible factor that needs to be watched is that the U.S. resort to economic warfare in response to a military conflict may inspire some governments to diversify their international reserves into non-NATO currencies. The weighted dollar index fell 0.5% overnight, and the dollar against individual currencies lost 0.6% against the yuan, 0.6% versus the Turkish lira, and 0.4% relative to the euro, Aussie dollar, kiwi and Mexican peso. Not all currencies capitalized from the dollar’s drop. The yen and loonie are unchanged, and Swissie and sterling only rose 0.1% and 0.2%. The ruble continues to hover near 107 per dollar.
West Texas Intermediate crude oil and gold prices retreated a further 1.0% and 0.5%.
But this being FOMC Day, ten-year sovereign debt yields are up six, four, three and one basis points in Germany, the U.K., the United States, and Japan. The U.S. 30-day fixed mortgage rate last week was 4.27%, up 18 basis points from the previous week and 3.33% in the final week of 2021.
Wednesday has been a comparatively light day from a data release standpoint.
Japan’s trade deficit of JPY 668 billion in February was considerably larger than anticipated as import growth surpassed expectations while export demand fell short of what analysts were expecting. A surplus of JPY 176 billion had been recorded in February 2021, and the seasonally adjusted deficit of JPY 1.031 trillion last month was a third times wider than January’s gap.
Likewise, Germany’s current account surplus dived to a 21-month low of EUR 11.8 billion in January from EUR 20.4 billion in January 2021 and a monthly average during 2021 of EUR 20.6 billion.
Portuguese producer price inflation leaped 2.9 percentage points to a record high of 20.7% in February. That also compares to negative 2.0% PPI inflation in February 2021. Portuguese producer prices posted a 2.7% month-on-month advance in the latest reported month, and now faces the moonshot in energy costs that occurred in March.
Italian consumer price inflation in February has been confirmed at the preliminary estimate and 318-month high of 5.7%.
CPI inflation in Argentina, an economy with a notoriously bad record of maintaining price stability, rose to 42.3% in February from 50.7% in January.
House price inflation in China fell to a 74-month low of 2.0% last month. For some time, a top objective of Chinese economic policy has been to wring the speculative element out of the housing market.
The drop of Japanese industrial production in January has been revised a half percentage point inward to 0.8% from 1.3% reported two weeks ago. January still saw the fifth monthly decline in output from the past seven reported months, and January level of production was 0.5% below the year-earlier level. Industrial capacity was 1.3% lower than in January 2021 after posting successive annual year declines of 0.5% in 2019, 0.9% in 2020, and 1.0% in 2021.
As a percent of GDP, New Zealand’s current account deficit swelled to 5.8% in 2021 from a 19-year low of 2.3% in 2020 and 3.3% in 2019.
Greek unemployment in January matched December’s 138-month low of 12.8%.
JUST IN: U.S. retail sales and import/export price data out at 12:30 GMT exemplify to leap in gasoline prices even before fighting broke out in Ukraine. Retail sales at U.S. gas stations jumped 5.3% on month in February and to 36.4% above a year earlier. Overall retail sales, however, went up just 0.3% on month, a tad less than forecast, although the 1.7% advance in December-February versus September-November retained dynamism.
Import prices, which had jumped 1.9% in the first month of 2022, climbed another 1.4% on month in February. Imported fuel cost 6.9% more in February than January, and non-fuel costs went up 0.8%. On-year import price inflation has accelerated from 3.0% in February 2021 to 10.9% one year later. Export prices jumped 3.0% on month and 16.6% on year last month.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: German current account, Japanese trade balance, U.S. retail sales and import prices