Financial Markets Bracing for More Aggressive Interest Rate Hikes by Fed and Other Central Banks

March 23, 2022

Investors increasingly are in an Armageddon state of mind. The question being considered is “what if,” and it is being applied in several directions.

  • What happens if Putin resorts launches crippling cyber attacks on infrastructure systems in the United States and its allies, or resorts to weapons of mass destruction, whether chemical, biological or nuclear? With Russian troop advances stalled in Ukraine, the answer day by day seems a matter of when, not if.
  • What if the conflict in Ukraine spreads across to a neighboring NATO country, inadvertently or by mistake, and does the reason for such an escalation even matter?
  • What if Federal Reserve interest rate hikes ramp up to moves of 50 basis points or more, and what does that imply about the possible rate level at end-2022 and beyond? Powell, who tried to quell such thinking at the press conference on March 16, is now seemingly preparing markets for such an eventuality and sooner rather than later.
  • What if the variant of Omicron spreads more widely than assumed? Will restrictions be re-tightened, or have societies tired of fighting the pandemic and sufficiently accepting to let it rip?
  • What if the distraction of other problems prevents countries from taking steps to flatten the damage of climate change, and the process accelerates beyond the point of no return?
  • If Republicans win big in the November elections, what happens to America’s leadership among Western nations, the global balance of power, and the dollar as linchpin of the international monetary system?

The dollar continued to swing widely and diversely overnight, rising strongly against the yen, euro and Swiss franc but depreciating against commodity-sensitive currencies like the Canadian, Australian and New Zealand dollars. The dollar also eased 0.2% relative to sterling but climbed 0.3% measured by the weighted DXY index.

Prices for West Texas Intermediate oil and gold have climbed 2.3% and 0.4% thus far today.

Share prices in Europe are down by 0.5-1.0% in Germany, France, Italy and Spain, and a similar movement at the U.S. open is suggested by the softness of stock futures. Bargain hunting was prevalent in Asia, where equities closed up 3.0% in Japan, 1.2% in Hong Kong, 0.9% in South Korea, and 0.8% in Taiwan.

The ten-year British gilt yield settled back three basis points, while its U.S. and German counterparts dipped a basis point each overnight. A big jump in the U.S. 30-year fixed mortgage rate of 23 basis points last week to 4.50% depressed mortgage applications by 8.1% on top of their 1.2% loss in the prior week.

Thickening fear this month was reflected in Danish consumer confidence which tumbled to a 161-month low of minus 14.4 from a reading of -3.2 in February and +8.2 as recently as November. Likewise consumer sentiment in The Netherlands slumped nine points to a 97-month low of negative 39 in March, well below that indicators long-run average of -8. But in Turkey of all places, consumer confidence recovered to a 2-month high in March.

Japan’s indices of leading and coincident economic indicators for January were each revised lower. The LEI punched in at a 3-month low, while the trend designation on the coincident index was labeled “weakening” for a fifth straight time.

British consumer prices rose 0.8% on month in February, lifting the 12-month increase more sharply than forecast to a 359-month high of 6.2% from 5.5% in the prior month and just 0.4% a year earlier. Core CPI inflation accelerated to 5.2% last month from 0.9% in February 2021.

British producer output price inflation accelerated to a 161-month high last month of 10.1% from 9.9% in January and 0.9% in February 2021, while producer input price inflation of 14.7% was the most since an on-year advance of 15.2% in November. The ONS British house price index recorded year-on-year growth of 9.6% in January, a six-month low.

CPI inflation in Singapore accelerated to a 97-month high of 4.3% in February from 4.0% in the previous two months and 0.7% in February of 2021.

South African CPI inflation of 5.7% in February matched January’s pace and remained just 0.2 percentage points below December’s 57-month high.

Following a 13-year high in November of 9.8%, South Korean producer price inflation fell in back-to-back months to a 5-month low of 8.4% in February.

Taiwanese retail sales recorded a sixth straight year-on-year increase in February but, at only 0.2%, the smallest rise in the streak by a considerable margin.

South American central banks announced further interest rate increases to counter inflation in Argentina and Paraguay. The Central Bank of Argentina‘s 7-day Leliq rate has been raised by two percentage points to 44.5%, which still remains below CPI inflation that was at a 5-month high of  52.3% as of February. The rate had previously been lifted 200 basis points in January and by 250 bps in February after spending 2021 and much of  2020 at 38.0%. The Central Bank of Paraguay‘s policy interest rate had been at a record low of 0.75% from June 2020 until a 25-basis point hike in August 2021. Seven straight additional monthly rate hikes followed, including three in a row of 125 basis points each followed by 25-bp highs in both January and February, and today’s greater 50-basis point increase. That bring’s the rate level to 6.25%, highest in almost seven years but, as in Argentina, still south of the rate of CPI inflation. In the year to February, Paraguayan consumer prices climbed at a 133-month high of 9.3%.

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

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