Inflation and Russian Invasion of Ukraine Casting Longer Shadows

March 17, 2022

Equities behaved in a widely diverse way overnight after the Fed enacted the first of many rate hikes. Share prices closed up by 7.0% in Hong Kong, 3.5% in Japan, 3.0% in Taiwan, 1.8% in India, 1.7% in China, and 1.1% in Australia. But stock markets so far are down this Thursday by 1.0% in Italy, 0.8% in Germany, 0.5% in Spain and 0.3-0.5% in U.S. futures.

The dollar is down 0.5% against sterling but up 6.5% against the ruble and 0.7% against the Australian dollar. The yen, euro, and Swiss franc show much smaller variations.

The 10-year U.S. Treasury yield fell back five basis points, and its German, British and Japanese counterparts each dipped a basis point.

Commodity prices are on the rise again amid worrisome news from the Ukraine-Russian conflict. WTI oil jumped 5.6%, and gold rebounded 2.0%.

Russia appears intent upon transforming Ukraine into a wasteland. The fact that at least 7000 Russian soldiers have died apparently isn’t phasing President Putin. Concerns continue that Russia may resort to chemical or even nuclear ones in order to speed things up. Ruble weakness in offshore trading reflected fears of a Russian default.

The Federal Reserve didn’t take any actions yesterday that had not been expected, but a plan of increases at every one of the six remaining policy reviews in 2022 is in play, as well as further tightening into a restrictive posture during 2023.

A number of other central banks have been hear from in the brief span since Fed Chairman Powell’s press conference.

The Bank of England as expected engineered a 25-basis point increase in its Bank Rate, but the 8-1 vote included a dissent in favor of a 50-basis point increase. The rate had previously been raised by 15 basis points in December and 25 bps in February, and at 0.75% is now back to its pre-pandemic level. Subsequent to preparing the quarterly Monetary Policy Report in February, Russia invaded Ukraine, and today’s statement asserts that that development is “likely to accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes.” Inflation will peak later than April, the previous presumed tipping point, and above the 7.25% level that had been predicted. Officials now foresee inflation reaching 8% by late 2022 and perhaps even above that level in 2023. Recent growth has been pleasantly resilient, but is “expected to slow to subdued rates during the course of this year…. he Committee judges that some further modest tightening in monetary policy may be appropriate in the coming months, but there are risks on both sides of that judgement depending on how medium-term prospects for inflation evolve.”

A full percentage point increase in the Central Bank of Brazil‘s Selic rate to 11.75% matched what analysts were expected. The move was agreed unanimously, and a released statement foreshadows a similarly-sized rate hike at the next policy review: “For its next meeting, the Committee foresees another adjustment of the same magnitude. The Copom emphasizes that its future policy steps could be adjusted to ensure the convergence of inflation towards its targets and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy.” Today’s rate hike was the ninth tightening in a sequence that began one year ago from a cyclical low of 2.0%. Brazilian CPI inflation has accelerated from a 21-year low of 1.9% in May 2020 through 5.2% in February 2021 to 10.5% last month. “The Committee considers that, given its inflation projections and the risk of a deanchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into an even more restrictive territory.” The medium-term target is 5%.

Officials at the Hong Kong Monetary Authority and Central Bank of the Republic of China (Taiwan) announced 25-basis point interest rate hikes in lockstep actions following the Federal Reserve’s similar move. After the first hike since December 2018, Hong Kong’s new base rate level will be 0.75%. Taiwan’s discount rate had been at 1.125% since a 25-basis point cut in March 2020 but now returns to 1.375%, and this move is meant to counter inflationary pressure. With a series of additional Federal Reserve rate hikes lying ahead, similar paths seemingly will be traced in Hong Kong and Taiwan.

The Central Bank of Ubekistan‘s policy interest rate was jacked up three percentage points to 17%, its highest level since the final 7 months of 2004 when such was at 18%. In between, the rate had been as low as 9% from the start of 2015 until mid-2017. During the first pandemic year, there had been two 100-basis point cuts, and the rate had been at 14% since September of that year. Today’s actions is intended to prevent “the growth of devaluation and inflation expectations.”

Bank Indonesia‘s seven-day reverse repo rate has been kept at its record low of 3.5%, a level that has existed since a 25-basis point cut in February 2021 culminated a string of six such reductions in the span of 12 months. CPI inflation averaged somewhat less than 2% last year and is expected to say within target this year.

Turkish inflation, by contrast, has accelerated very sharply.  This month mark’s the second anniversary of a two percentage point hike in the Central Bank of Turkeys one-week repo rate to 19% elicited the wrath of Turkish President Erdogan and got the central bank president fired. Subsequently, the rate was reduced in four consecutive monthly moves to 14% where it has stayed since the start of last year including at today’s policy review. The subsequent statement from officials attributes the latest rise of inflation to “rising energy costs resulting from the heightened regional conflict, temporary effects of pricing formations that are not supported by economic fundamentals, supply side factors such as the rise in global energy, food and agricultural commodity prices, supply constraints, and demand developments.”

In response to a number of questions expressing concerns over whether U.S. inflation can be lowered to 2% without producing a recession, Chairman Powell asserted that the economy currently has plenty of upward momentum. U.S. data out today back that claim:

  • A 0.5% increase of industrial production last month resulted in the largest 12-month rate of increase (7.5%) since mid-2021.
  • The Philly Fed monthly manufacturing index jumped 11.4 index points to a 4-month high in March.
  • Housing starts jumped 6.8% on month and 22.3% on year to a 188-month high.
  • New jobless insurance claims fell by 15k last week to a 10-week low of 214k. The 4-week average increase of 223k was at a 9-week low.

CPI inflation in the euro area last month has been revised 0.1 percentage point higher to a record high of 5.9% from 5.1% recorded in January and 0.9% in February 2021. Core inflation climbed from 1.1% in February 2021 to 2.7% last month.

Japanese core domestic machinery orders fell 2.0% last month, which was a tad less than expected. Orders from the government plunged 13.6% on month, while export orders went up 0.9%.

Australian unemployment dropped 0.2 percentage points to a 14-year low of 4.0% in February, and that news was accompanied by a greater-than-forecast 47.4k rise in employment. Labor market participation also exceeded expectations.

New Zealand GDP growth rebounded from a 3.6% drop in 3Q 2021 with a 3.0% advance in the year’s final quarter. A burst of the Omicron variant has forced officials to impose restrictions, but cases subsided late in the year. GDP still contracted 1.4% for 2021 as a whole after expanding 2.2% in 2022.

The Swiss trade surplus swelled to its largest degree (CHF 5.702 billion) during February in at least 70 years. Spain’s trade deficit in January of EUR 6.1 billion, by contrast, was its worst result in 157 months.

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

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