Bracing for Escalating Wars in Ukraine and Against Inflation and Covid

April 12, 2022

All signs are pointing to a more focused and indiscriminate Russian assault on Ukraine. A coming tightening of Western economic sanctions drove the price of West Texas Intermediate oil up 4.1% overnight, but what Ukraine desperately needs is greater military support. That may be coming, too.

Covid cases are rising again. 49.4 thousand new cases were identified yesterday in the United States, lifting the 7-day average to 10% above what such was two weeks ago. The cumulative U.S. death count of 984k will likely cross the one million mark within a couple of weeks. One estimate of the global number of Covid cases since the start of the pandemic just went above half a billion people.

Today’s main economic event, the release of U.S. consumer price data for March, has been preceded by price data reports today in Germany, Japan, Serbia, Portugal, and Romania that show little relief from the past year’s spike of inflation.

German consumer price inflation leaped 2.2 percentage points to 7.3% in March (and 7.6% on a harmonized Euroland basis). One has to go back before East and West Germany unified all the way to late-1981 to find a year-on-year West German inflation rate as high as 7.3%. A 2.5% advance from February’s level was the largest monthly increase in 70-1/2 years. Energy prices soared 16.4% on month and 39.5% on year. Food prices were 6.2% above a year earlier. Core inflation excluding those two components was at 3.4%, well above the ECB target.

German wholesale prices shot up by a greater-than-expected 6.9% last month and lifted the 12-month rate of increase by six percentage points to a record 22.6%. Average WPI inflation in the first quarter of 18.5% was up from 9.8% on average in 2021. Wholesale prices for mineral oil products were 70.2% above a year earlier.

Japanese domestic producer prices increased 0.8% last month and 9.5% from a year earlier. By comparison, such rose just 1.2% during the twelve months through March 2021. Import prices climbed 3.3% on month and 33.4% from March 2021 levels.

Serbian CPI inflation accelerated to a 165-month high of 9.1% in March. A year earlier, Serbian inflation was just 1.8%. Likewise, Romanian CPI inflation of 10.2% in March represents a 209-month high and was up from 8.5% in February and 3.1% in March 2021.

Portuguese consumer prices jumped 2.5% in March, lifting on-year inflation there to a 333-month high of 5.3%.

U.S. CPI inflation accelerated to a 483-month high of 8.5% last month versus a street consensus forecast of 8.4%. That’s a rise from 7.9% in February, 2.6% in March 2021, and a cyclical low of 0.1% in May 2020. Energy, food and service-sector consumer prices were 32.0%, 8.8% and 4.7% above year-earlier levels last month. Core inflation, that is excluding both food and energy, was at 6.5%, most since August 1982, which coincidentally was the same month that the bear market in the DOW associated with the recession of July 1981-November 1982 ended. On a month-on-month basis, consumer prices climbed 1.2% in March, most in 42 years, reflecting increases of 11.0% in energy, 1.0% in food, and 0.6% in service-sector prices.

Prior to the U.S. release of CPI figures, other reported U.S. data revealed a drop in the NIFB small business sentiment index that was not quite as pronounced as analysts were anticipated. The reading of 93.2 was down from 95.7 in February, 97.1 in January, 98.9 in December and 102.5 last June.

The persistence of inflation around the world has been fed by continuing tangled supply chains and pent-up demand following severe restrictions on social movement in 2020, and just when everyone was hoping for the spike to subside, the war in Ukraine has introduced an additional toxic factor into the mix, forcing central bank to play catch up.

Equities continued to struggle overnight, dropping 1.8% in Japan, 1.6% in South Korea, and 1.0% in Singapore. In Europe, share prices are down 0.5-1.0% in Switzerland, Germany, France and Great Britain. U.S. equities were hit hard on Monday but reverted to pause mode overnight as investors didn’t want to get whiplashed by a smaller-than-expected U.S. CPI increase.

Longer-term sovereign debt yields continued to grind upward overnight, with 10-year bonds up 3 basis points in Germany, 2 bps in France, and a single basis point each in the United States, Great Britain and Japan.

The weighted DXY dollar index rose 0.2%, mainly as a result of appreciation against the Japanese yen. The yen touched a 7-year low of 125.765 per dollar, which in turn has climbed 17% above its 52-week low of 107.47 on April 22, 2021.

Anxious times are often good for gold, whose price firmed 0.6% overnight. Meantime, Bitcoin climbed 2.1%.

The latest monthly batch of British labor market statistics revealed another large decline in jobless claims (46.9k) during March, an almost nine-quarter low of unemployment (3.9%), and accelerating growth in average weekly earnings to 5.4% in December-February (and 4.0% for regular pay that excludes bonuses). In a separate U.K. release, the BRC reported a 0.4% on-year drop in same-store sales during March. That was the first negative 12-month change since October and the biggest slide since last September, a sign of mounting concern about the ramifications of the war in Ukraine.

The German ZEW Institute’s monthly indices of investor sentiment in Germany and Euroland fell to 25-month lows this month, but the incremental deterioration after March’s plunges were smaller than feared. Euroland’s index has swung to -43.0 from +49.4 back in January. Perceived current conditions in April suffered a bigger month-to-month deterioration than had been foreseen, however.

In faraway Australia, the Ukraine War is exerting less impact than in Europe. The March business confidence index compiled by the National Australia Bank rose 3 points to a 5-month high in March, and a doubling of business conditions to a reading of 18 was the largest month-to-month favorable change in 21 months.

Turkish retail sales and industrial production rose on month in February and were respectively 6.2% and 13.3% greater than a year earlier.

France posted an eighth straight current account deficit during February, this time of EUR 1.092 billion, which was considerably smaller than forecast.

Indian CPI inflation accelerated 0.8 percentage points to a 17-month high of 6.95% in March. Due to a surprisingly steep 4.7% monthly plunge of industrial production in India during February, the year-on-year change of that vital economic statistic swung from +1.5% in January to -1.7% in the latter month.

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



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