Global Demand Starting to Be Constrained by Inflation and Tighter Monetary Policies

April 7, 2022

This week’s equity sell-off extended into Asian markets overnight. European losses, in contrast, have been reversed partly, and U.S. stock futures are little changed. Equities dropped between 1% and 2% in Taiwan, Japan, China, Hong Kong, and India but have rebounded so far by 1.3% in Spain and Italy, 0.9% in France, and 0.7% in German. The British Ftse and Dow futures are unchanged, while the Nasdaq futures index is 0.3% firmer.

The weighted DXY dollar index touched its strongest level overnight (99.82) since March 2020 but currently shows a net uptick of merely 0.1% from yesterday’s close. Dollar movements against the euro, yen, Swiss franc, loonie, and sterling have likewise been inconsequential, but gains overnight were made of 0.5% and 0.4% versus the Aussie dollar and kiwi.

The Russian ruble against which the dollar fell around 5% overnight has been today’s strongest currency. The ruble has recovered to its pre-invasion level, and this is not good news, casting some doubt on the effectiveness of economic sanctions to sap Putin’s ability to wage war. To a large extent, the ruble’s recovery is artificial, reflecting imposed capital controls, a draconian 20% central bank interest rate, and currency market intervention. But the country has so far not defaulted as many thought likely. The Russian stock index is 0.8% higher.

The price of oil had dropped sharply earlier this week on the release of U.S. emergency reserves but turned 1.5% higher overnight. Gold meanwhile strengthened 0.6%, and ten-year U.S. Treasury, German bund, and British gilt yields are unchanged from Wednesday closing levels.

The composite global purchasing managers index compiled by JP Morgan fell 0.8 points to a reading of 52.7 in March and included a 15-month low in business optimism.

The volume of retail sales in the euro area advanced only half as much as analysts were anticipating during February. A 0.3% increase followed a 2.1% slump in December and a 0.2% rise in January. Demand was constrained by elevated inflation and will shortly be hit by the additional impact and future uncertainty of the war in Ukraine.

That impact was clearly reflected in a record 3.6% month-on-month leap in Dutch consumer prices during March, which lifted the year-on-year inflation rate to a 537-month high of 9.7% versus 6.2% in February and 1.9% in March of 2021. The consumer energy price component was up 157% from a year earlier.

Similarly, Austrian wholesale price inflation jumped to 25.6% in March from 16.3% in February and 6.9% in March 2021. Cypriot consumer price inflation climbed another half percentage point to 7.1%, and Irish CPI inflation accelerated a full percentage point last month to a 236-month high of 6.7%.

German monthly industrial production growth slowed to 0.2% in February from back-to-back gains of 0.9% in December and 1.4% in January. Capital goods output dropped 2.0% in the latest reported month.

Norwegian industrial production fell 0.8% on month and rose just 1.6% on year in February.

The National Bank of Serbia became the latest monetary authority to tighten its stance, raising its policy interest rate by a half percentage point to 1.50%. Such had been at 1.0% since a 25-basis point cut in December 2020 that culminated 125 basis points of reduction during the first year of the pandemic. Officials reacted to an acceleration of Serbian CPI inflation from 1.2% in February 2021 to a 104-month high of 8.8% a year later. A released statement explaining today’s move remains cautiously upbeat about the outlook for economic growth: “As the outbreak of the Ukraine crisis has dimmed the growth outlook both globally and for the euro area as our most important trade partner, downside risks to Serbia’s economic growth this year are now more pronounced, though the effects are estimated to depend mostly on the length of the crisis.” With inflation now roughly three times greater than the medium-term target range midpoint of 3%, restoring price stability as in most countries has become a policy priority.

British quarterly labor productivity growth in the final quarter of 2021 was revised 0.3 percentage points higher to 1.3%. The Halifax house price index in the U.K. increased 1.4% on month in March, most since April 2021, and was 11.0% greater than its year-earlier level.

Japan’s indices and leading and coincident economic indicators fell in February to 5- and 3-month lows.

Australia’s trade surplus of A$ 7.457 billion in February as 37% narrower than in January and the smallest surplus since March 2021.

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


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