Financial Markets Reflecting Concerns about Stagflation and Russian Military Aggression

April 6, 2022

Investors are bracing for aggressive monetary policy tightening in the United States and elsewhere to counter inflation that has climbed shockingly high, and business confidence in the one-year economic outlook has been scaled sharply backward.

Ten-year sovereign debt yields jumped overnight by ten basis points in the United States and Great Britain, eight bps in Italy, six bps in Germany, France and Spain, and five bps in Japan.

The price of West Texas Intermediate crude oil climbed 1.7% overnight, shrugging off higher U.S. inventories reported yesterday. Gold is little changed, however.

Stock markets in Asia lost 1.9% in Hong Kong, 1.6% in Japan, and 0.9% in India and South Korea. Share price losses in Germany, France, Italy and Spain so far today each exceed 1.0%. U.S. futures are also down appreciably especially in the tech sector that is particularly vulnerable to a rapid rise in borrowing costs.

The dollar is trading firmly but little changed against the euro, sterling or its DXY weighted index but 0.3% stronger against the Japanese yen.

The U.S. and other Western governments are considering stiffer economic sanctions against Russia.

There have been a slew of anti-inflationary comments by Fed officials this week, with previously perceived doves now on board with an aggressive tightening via a string of interest rate increases as well as a rundown of the central bank’s balance sheet. FOMC minutes due at 14:00 EDT today (18:00 GMT) are expected to clarify the balance sheet plan.

Producer prices in the euro area rose 1.1% on month and by a record 31.4% on year in February. Prices for energy and intermediate goods were 87.2% and 20.8% greater than in February 2021.

Hong Kong’s private purchasing managers index fell in March to a 23-month low of 42.0. That was also the third sub-50 score in a row.

In China, where officials are employing a full court press against a resurgence of Covid-19, the composite and service-sector PMI readings slumped sharply in March to 25-month lows of 43.9 and 42.0.

India’s composite and service PMI readings of 54.3 and 53.6 were at 3-month highs but accompanied by disturbing inflation indications that saw input costs in services accelerate to and 11-year high and surpass its manufacturing counterpart.

Euroland’s construction purchasing managers index fell 3.5 points to a 5-month low of 52.8. The French construction gauge fell below the 50 level that separates improvement from contraction and was at a 7-month low.

German industrial orders had recorded three consecutive monthly increases of at least 2.0% after a 5.8% plunge last October but in February dropped 2.2%. Analysts were expecting only a marginal setback. The combination of soaring energy expenses and the war in Ukraine overwhelmed better news on the Covid front. On-year growth in factory orders slowed to 2.9% in February from 7.3% in January.

Unemployment in Ireland increased 0.3 percentage points to an 8-month high of 5.5% last month.

Consumer confidence in Spain dived to a 17-month  low of 53.8 in March from average scores of 86.3 in the four prior months and 97.8 in September-October.

The National Bank of Poland’s reference interest rate has been increased by a great-than-forecast full percentage point to 4.5%. From a record low of 0.1%, this was a seventh straight increase at a scheduled policy review.

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

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