Stagflationary Outlook Gaining Traction and Western Leaders in Brussels Plan Contingent Plans for Ukraine Crisis
March 24, 2022
The world’s attention today is on Brussels where U.S. President Biden will be meeting with NATO allies, the European Council of political leaders, and Other Group of Seven members. The meetings are meant to coordinate a response to Russia’s continuing invasion of Ukraine, where the use of Russian weapons of mass destruction appears increasingly probable.
Today’s other theme is an economic outlook greatly complicated by Russian aggression and increasingly fraught with risks of even higher inflation, softening growth, and central bankers having no alternative to ramping up interest rates. Several central banks held policy reviews today, and March preliminary purchasing manager survey results reported for Euroland, Japan, Great Britain and Australia, while highlighting the stimulus of diminishing Covid restrictions also flag a substantial deterioration of business confidence and paint a future picture of stagflation.
Ten-year sovereign debt yields today have risen eight basis points in the United States, 7 bps in Germany, Italy and the U.K., 6 bps in France and five basis points in Spain. The price of gold is 0.5% higher, and WTI oil has retained its big price jump on Wednesday and is hovering around $115 per barrel versus $66 about 13 weeks ago.
As a beneficiary in times of geopolitical tension, the dollar firmed 0.2% on a weighted basis overnight. The rise of 0.4% against the yen exceeds upward bumps of 0.2% against the euro and 0.1% versus the Swiss franc, Turkish lira and sterling. Japan’s currency has been depressed by the widening divergence between the Bank of Japan’s monetary stance and the forward guidance of other central banks that are now prioritizing the need to contain inflation.
Stock markets fell today by 0.9% in Hong Kong, 0.6% in China, and 0.5% in New Zealand but ros 0.3% in Japan. European equities are narrowly mixed and U.S. futures suggest an initial dead-cat upward bounce following yesterday’s sell-off.
Euroland’s composite purchasing managers index slipped from a 3-month high in February to a 2-month low in March. Although the 54.5 reading this month was not as low as anticipated, there was a big diversity between manufacturing and services. Factory activity at a 14-month low was hurt by intensifying inflation and supply chain delays, each greatly aggravated by Russia’s unprovoked assault on neighboring Ukraine. The service-sector PMI only slipped 0.7 points to a 2-month low, buoyed by lessening business restraints to combat Covid’s spread. Taken together, the Euroland’s survey points to a difficult second quarter.
Within Euroland, the German composite PMI slid 1.0 point to a 2-month low of 54.6, but that display of resilience was shadowed by a large deterioration in business confidence about the future, which dropped to a 21-month low amid record inflation and geopolitical uncertainty. The French composite purchasing managers index printed at an 8-month high of 56.2 in spite of a 5-month low in manufacturing.
Britain’s composite PMI was likewise above expectations at 59.7, a 2-month low and just 0.2 points below the February reading. But here, too, there was a divergence between a 13-month low in manufacturing, which bears the brunt of the Russian mess, and a 9-month high in services. Also, business confidence fell to a 17-month low.
Japan’s composite PMI was below the 50 level that separates improvement from deterioration, but the 49.3 reading was above the scores in the first two months of 2022. Manufacturing rose to a 5-month high in spite of the longest input supply delays in almost 11 years. The services PMI stayed under the 50 level at 48.7.
Australia’s composite PMI rose 0.5 points to a 10-month high of 57.1. The services PMI also increased half a point to a 10-month high, while score for manufacturing went up 0.3 points to a 3-month high.
The Bank of Norway‘s policy interest rate was increased today by 25 basis points to 0.75%, matching incremental increases last September and December from a pandemic low of zero percent. The move was supported by all members of the Monetary Policy and Financial Stability Committee. However, a released statement served notice that inflation and wage growth, which have exceeded expectations, are being monitored carefully and that “if there are prospects of persistently high inflation, the policy rate may be raised more quickly.” Officials now suspect that the inflation rate will need to be lifted to around 2.5% by end-2023.
At the Central Bank of The Philippines, officials kept their 2.0% record low policy interest rate. The rate had been cut in half during 2020 and has been 2.0% since November of that year. Inflation, according to a released statement, is expected to average slightly above the 2-4% target range in 2022 but mainly because of commodity price pressures, and officials project inflation receding to 3.6% next year. These projected levels represent an upward revision from earlier, and officials are not closing the door on adopting a less accommodative stance: “Given the potential broadening of price pressures over the near term, the BSP stands ready to respond to the buildup in inflation pressures that can disanchor inflation expectations, in keeping with its price and financial stability objectives.”
Back in January 2015, policymakers at the Swiss National Bank reduced their policy interest rate to -0.75%, and supplemented that tool with a promise to intervene at their discretion to counter excessive strength in the Swiss franc. Those two parameters were not changed at today’s quarterly policy review even though officials revised the projected path of inflation up sharply in the near terms. Next quarter, for example, is likely to see on-year CPI inflation of 2.2%, a full percentage point above what was predicted three months ago, but the new projection sees sub-1% inflation restored by the second quarter of next year and occurring again in the second half of 2024. As a widely perceived refuge currency, officials will need to be on high alert to the danger of an overvalued franc during the Russian-Ukrainian crisis. Swiss economic growth is likely to slow to 2.5% this year.
Monetary policy reviews today in South Africa and Mexico are each likely to yield interest rate hikes, and a 25-basis point repo rate hike at the South African Reserve Bank was just confirmed and included the votes for a 50-basis point rate hike by two of the five policymakers, according to a released statement. Projected inflation this year was revised up 0.8 percentage points to 5.8% and is expected to be followed by 4.6% inflation in 2023. Gradual rate normalization will be likely needed through 2024. Today’s move was the third 25-basis point hike of the cycle and followed increases in January and November 2021. The rate had been at a pandemic low of 3.5% from July 2020 until the November 2021 tightening. Previously in 2020, the rate was slashed by three full percentage points from 6.5% at the start of that year.
Other data release highlights today were
- A 6.1-point dive in overall French business sentiment to an 11-month low in March. Confidence in manufacturing also dropped to an 11-month low, while sentiment in the services sector fell to a 2-month low.
- Britain’s monthly distributive trades survey index declined five points to a reading of +9 in March, lowest since December and down very sharply from +60 in August 2021.
- Czech consumer confidence and business sentiment declined to 110-month and 2-month lows in March.
- Finnish producer price inflation, which had been more negative than -5% in the early months of the p pandemic, again surpassed 20.0% in February but, at 22.4%, was at a 3-month low.
- The U.S. current account deficit in 2021 of $821.6 billion was a third times larger than in 2020 and as a percentage of GDP widened to -3.6% from- 2.9% the year before. The fourth quarter deficit of $2.17.9 billion closely matched analyst expectations and was also little changed from the prior quarter’s gap.
- New U.S. weekly jobless insurance claims declined 28k to a pandemic-low of 187k last week. The drop had not been anticipated.
- U.S. durable goods orders sank 2.2% in February, much more than forecast but following two straight increases over more than 1.0%.
- IHS-compiled U.S. purchasing manager surveys for March produced 8-month highs of 58.5 in the composite index and 58.9 in services. The manufacturing PMI matched the composite score of 58.5 and represents a six-month high. All these results exceeded analyst expectations.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Norway, Central Bank of The Philippines, NATO talks, purchasing manager surveys, South African Reserve Bank, Swiss National Bank, U.S. current account