Rising Inflation Lifts Interest Rates, the Dollar and the Price of Gold

April 13, 2022

The hope is that March might see inflation crest, but investors have heard that story before only to be disappointed. Fresh on the heals of yesterday’s U.S. March CPI data (a 483-month high of 8.5% in the total index and a 475-month 6.5% high of core CPI), U.S. producer price data arrive today. The Federal Reserve appears likely to authorize several 50-basis point interest rate hikes over coming months.

Just about all countries face excessive and rising inflation, so the Fed’s policy shift has plenty of company. Today’s movers have been the Reserve Bank of New Zealand and the Central Bank of Namibia. The Bank of Canada also is reviewing policy and expected to tighten its overnight interest rate target.

At $1983.20 per ounce, the price of gold is presently hovering near its overnight high, 29% stronger than on March 16 and seemingly readying for a test of its $2043 peak touched earlier this year.

Bitcoin, on the other hand, slid 0.4% overnight and below the $40,000 threshold.

The dollar firmed marginally overnight on a DXY weighted basis, securing a wider beachhead above 100.0. The dollar climbed 0.6% against the Japanese yen and 0.3% relative to the euro.

The Russian ruble continues its daily pattern of strengthening during Russian trading hours due to intervention support and aided capital controls but then fading during after-hours, e.g. to 85.6 per USD yesterday afternoon. Russia’s stock market has fallen for a fourth consecutive session.

Other continental European stock markets have slipped today as well, and in Russia’s close ally of China, stocks dropped 0.8%. Share prices, in contrast, closed up 1.9% in both Japan and South Korea, and U.S. futures show increases of 0.6-0.9% in the S&P 500, DJIA, and Nasdaq at the moment.

10-year sovereign debt yields advanced overnight by six basis points in Great Britain and two basis points each in the United States and Germany.

China’s trade surplus of $47.30 billion in March was twice the size analysts anticipated but for reasons that reflect poorly on that economy’s prognosis. Growth in China is being slammed by the government’s extreme reaction to the Omicron variant. Chinese imports in March were 0.1% below their year-earlier level, marking the first 12-month decrease in 19 months.

British consumer price inflation accelerated to a 30-year high of 7.0% in March from 6.2% in February, 5.4% last December and just 0.7% in March 2021. Core consumer prices rose 0.9% on month and climbed half a percentage point to a 12-month 5.7% rate of increase. British producer output price inflation jumped 1.7 percentage points to a 162-month high of 11.9% in March, and core PPI-O inflation was even higher at 12.0%. Producer input prices leaped 5.2% compared to February and by 19.2% against the same month a year earlier.

Spanish CPI inflation in March was confirmed at 9.8%, a 442-month peak. Core CPI in Spain of 3.4% was 0.4 percentage points greater than in February and up from 0.0% in March 2021.

The data release overnight of Japanese February core domestic machinery orders was considerably weaker than forecast. Instead of retreating 1.5% on month but still advancing over 14% on year as analysts were assuming, such plunged 9.8%, which resulted in only a 4.3% year-on-year increase. Moreover, government orders for machinery dropped 3.3% in February, and export orders were 2.8% lower.

The Westpac measure of Australian consumer confidence fell 0.9%, its fifth drop in a row but less pronounced than the four previous declines.

Germany’s’ current account surplus of EUR 20.8 billion in February was at a 2-month high and marginally larger than the surplus in February 2021.

Italian industrial production shot up 4.0% in February, its biggest monthly rise in a year and a half. Industrial production in Hungary also climbed solidly (+1.6%), but Romania reported a 1.0% drop of industrial production, again for February.

Monetary policy in Namibia takes its cue from the mandate for the Nambia dollar to shadow the South African rand. Consequently, 25-basis point interest rate hikes at SARB in January and March were matched by the Central Bank of Namibia by similar moves in February and now April. Namibia’s interest rate had been at a record low of 3.75% from August 2020 to this past February following cuts totaling 275 basis points in 2020, and at 4.25% now is still well below its pre-pandemic level.

The Reserve Bank of New Zealand’s Official Cash Rate has been raised twice as much as was expected this month. Today’s increase of 50 basis points followed three 25-basis point moves last October, November and February. CPI inflation in New Zealand increased to 5.9% last quarter, well above target, from 4.2% in 3Q, 3.3% in 2Q, 1.5% in 1Q and 1.4% in the final quarter of 2020. The first three OCR increases exactly reversed a cut of 75 basis points in March 2020, but officials now are racing to reestablish a policy-neutral rate level, according to a released statement:

Members noted that annual consumer price inflation is expected to peak around 7 percent in the first half of 2022. The risk of more persistent high inflation expectations has increased. The Committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations and minimize any unnecessary volatility in output, interest rates, and the exchange rate in the future.

Nonetheless, the kiwi fell by a tad more than 1% against the U.S. dollar following the RBNZ announcement.

U.S. producer price inflation blew past analyst forecasts to a 138-month high of 11.2% in March versus 4.1% a year earlier. Energy prices leaped 5.7% above February levels.

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

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