A Turn for the Worse in Ukraine-Russian Conflict Sends Dollar Up and Equities Down

March 18, 2022

Hopes had been kindled early this week by reports of progress in cease-fire talks, but those signs have not panned out, and a new worry is that China is moving closer to supporting Putin’s imperialistic ambitions.

The Central Bank of Russia did not raise its 20% policy rate further at today’s scheduled review, claiming that the 1150 basis points of tightening last month and capital controls have sufficiently stabilized financial markets and prevented inflation from racing out of control. In a released statement, the current situation is being euphemistically dubbed a “large-scale industrial transformation” that will depress GDP and raise actual and expected inflation, but those problems will run out of steam. A return to 4% CPI inflation is projected for 2024.

The Russian ruble at 104.9 per dollar is holding more-on-less stable, aided by unconfirmed reports that Russia had successfully serviced debt owed on dollar-denominated eurobonds, thus averting a default.

The dollar rose overnight by 0.5% measured by the DXY dollar index, whose dominate weight is the euro, which also fell back 0.5% against the U.S. currency. The dollar advanced 0.4% against the yen and touched a six-year high of 119.12 versus that currency. The dollar also gained 0.9% relative to the Turkish lira, but net movements overnight versus the Swiss franc, sterling, kiwi, Aussie dollar, peso, and yuan were inconsequential.

Equity markets in Germany, France, Italy and Spain are currently down between 1.0% and 1.8%. The British Ftse is sporting a 0.6% drop, and DJIA, SPX, and Nasdaq futures are off 0.6 to 0.8%. Stock markets overnight in the Pac Rim climbed 1.1% in China, 0.7% in Japan and 0.5% in South Korea.

The price of WTI oil advanced 0.7%, while that of gold fell 0.3%. Ten-year British, U.S. and German sovereign debt yields have declined 5, 3, and 2 basis points, respectively.

Japan reported higher CPI inflation on the same day that the Bank of Japan presented results of its 4 hour 36 minute review of monetary policy. The Bank of Japan defended its ultra-loose policy stance, blaming higher inflation mostly on rising energy and raw material prices as well as the dissipating effects of reduced mobile charges imposed a year ago. The central bank’s policy stance, known as quantitative and qualitative easing with yield curve control, was refined to its current framework back in September 2016. The policy imposes a short-term negative 0.1% interest rate and the use of quantitative stimulus to keep the 10-year JGB yield “around zero percent,” and officials are determined not to hit the brakes until CPI inflation goes somewhat above the 2% target and officials are confident it will stay in target in a stable manner without benefit of the stimulus.

The Bank of Japan’s undiminished policy stimulus contrasts with many other central banks in 2022. Although higher energy and food costs have lifted total CPI inflation to 0.9%, highest since October 2018 and despite the BOJ’s own expectation that inflation could pierce 2% in the near term, Governor Kuroda insists that such should not be equated with meeting the condition for ending the current policy stance. The data support his point. In February, the energy component of the CPI index leaped 3.0% on month and to the largest 12-month advance (20.8%) since January 1981. Food prices advanced 2.8% year-over-year, the most in four years. Consumer price inflation excluding perishable food rose 0.6%, and CPI inflation that also excludes energy was still negative 1.0%.

In commenting on Japan’s economy, the Bank of Japan’s statement said that GDP growth was picking up but also cited some weaknesses related to the pandemic and supply-chain delays. The war in Ukraine injects a downside growth risk and an upside inflation risk. Japan’s monthly tertiary index, which monitors trends in service sector activity, was reported today to have dropped 0.7% in January, the most in eight months, and to have been just 1.0% above the January 2021 level.

Today’s menu of data from the euro area revealed a record non-adjusted EUR 27.2 billion trade deficit in January compared to a surplus of EUR 10.7 billion in the first month of 2021. The energy trade deficit widened from EUR 15 billion euros in January 2021 to EUR 37.9 billion in January 2022, and total imports in the latest month were 44.3% greater than a year earlier. A separate release for hourly labor costs showed a 1.9% on-year advance last quarter compared to year-on-year increases of 2.3% in the third quarter and 2.8% in the final quarter of 2021.

Polish producer price inflation of 15.9% in February was just 0.2 percentage points below January’s 313-month high.

Italian construction output sank 0.9% on month and resulted in the smallest 12-month increase (13.2%) since September.

Swedish unemployment fell to 7.9% in February from 8.3% in January and 9.7% a year earlier.

Brazilian unemployment dropped 3 percentage point to 11.2% in January from 14.2% a year earlier.

And in Azerbaijan, the central bank implemented its fifth discount rate increase in the past half year, a hike of 25 basis points to 7.75%. Increases in September 2021, December 2021 and January 2022 were also 25 basis points in size, while that last October was 50 basis points (or half a percentage point). Altogether, this response to climbing inflation has totaled two percentage points. Azerbaijani inflation is projected to exceed 7.5% this year but to settle back in 2023.

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

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