Macron Wins with 58.6% of the Vote but Recessionary Fears Extend Equity Losses Around the World

April 25, 2022

Although less than the 66.1% to 33.9% margin of victory in 2017, French President Macron was reelected, beating Le Pen by a greater margin than expected. His margin this time was still comfortable at 17.2% — 58.6% to 41.1%. Had Le Pen’s far-right National Rally captured the government, the unity of NATO against Russian aggression might have crumbled.

But this piece of good news was not enough to dissipate last week’s dominant market theme of despair over the highest inflation in multiple decades, rising interest rates, western economic sanctions against Russia, and the fallout of the Chinese government’s no-tolerance approach to Covid. The fear is these converging factors will drive many economies into recession.

U.S. stock futures are down almost 1% on top of Friday’s nearly 1000-point plunge in the DOW. In Asia earlier today, equity markets tumbled 5.1% in China, 3.7% in Hong Kong, 2.4% in Taiwan, 1.9% in Japan, 1.8% in South Korea and 1.1% in India. Australia and New Zealand are closed for ANZAC Day and therefore spared. In Europe so far, share prices show losses today of between 1.6% and 2.4% in the U.K., Germany, France and Italy.

This week’s cover story in The Economist’s U.S. edition places blame for U.S. inflation squarely on the the Federal Reserve’s mishandling of monetary policy, refuting the point of “apologists” that note that inflation has also climbed sharply in most other economies. Another anomaly between the current situation and the botched U.S. monetary policy behind high inflation in the 1970s is that the dollar has been strengthening lately in contrast to its chronic weakness then. The weighted DXY dollar index is trading currently near its 25-month high touched overnight, and it is 0.5% stronger than Friday’s closing level.

Today’s dollar advance includes gains of 1.2% against the Chinese yuan and Mexican peso, 1.4% and 0.8% relative to the Australian and New Zealand dollars, 1.0% versus sterling and 0.6% vis-av-vis the euro.

Alternatively the dollar has dipped 0.2% against the Japanese yen and  sunk 4.4% against the ruble, which has now reversed all of its initial post-Russian invasion plunge and then some. Japan is one of the few developed economies still with excessively low inflation (CPI inflation excluding food and energy is 0.7% below year-earlier level).

The stampede out equities and mounting recessionary fears caused ten-year sovereign debt yields to fall today by seven basis points in the United States and Germany and five bps in Canada, the U.K., France and the Netherlands. With global economic growth so high in 2021, the perception of recession no later than next year is based on historical precedents that suggest that inflation has crossed above a threshold whereby the task of reducing such in a sustainable way to around 2% has been successful only when a significant recession was induced.

Weaker growth would mean lessening use of energy, and the price of West Texas Intermediate crude oil accordingly has fallen 3.8% today. The price of gold is 1.9% softer.

Japanese corporate service price inflation accelerated in March to a nine-month high but a still benign 1.3%. Japan’s index of leading economic indicators for February has been revised almost a full index point lower to a 5-month low. The index of coincident economic indicators was revised up 1.3 point, in contrast, and that was enough for officials to reclassify its trend from “weakening” to “improving.”

Consumer prices in Singapore leaped 1.2% in March, their largest month-to-month jump in 129 months, and that boosted on-year inflation by 1.1 percentage points to a 119-month high of 5.4%. In March 2021, CPI inflation had printed at 1.3%.

Spanish producer prices soared 6.6% on month and by a record 46.6% over the 12 months through March. The energy component of the inflation rate had been already high at 33.1% in March 2021 but now shows an on-year advance of 134.6%, lifting overall PPI inflation to a record high of 46.6% versus 6.4% a year earlier.

Two central banks have raised policy interest rates. The Central Bank of Paraguay benchmark was increased 50 basis points to 6.75%, bring its rise since the first of nine hikes last August to 600 basis points. And at the National Bank of Kazakhstan, the key interest rate was also lifted 50 basis points from 13.5% to 14.0%. This was its third increase of 2022 following moves of 50 basis points in January and 325 basis points in February. There were also three 25-basis point hikes made in the second half of 2021. The 14% rate level is now above the 2020 high of 12%. Kazakhstan’s interest rate is also above the current CPI inflation level, which is at a 77-month high of 12% and accelerating rapidly.

The German IFO business climate index did not fall further in April as widely forecast but instead recovered 1.0 point from March’s 14-month low to 91.8, still well below February’s 98.5 level. Current conditions and future expectations each recovered somewhat to 2-month highs.

Construction output in the euro area rallied in the early months of 2022, with monthly gains of 3.9% in January followed by 1.9% in February. The average level in those two months was 4.1% above the mean level in 4Q 2021. During the second half of last year, construction output had fallen 1.1% in 3Q and recovered only 0.4% in the final quarter. February construction exceeded its year earlier level by 9.4%.

Consumer confidence in the Czech Republic slipped further to a 116-month low, but business sentiment in that economy rose over 4.0 index points to a ten-month high. Turkish business confidence also rebounded in April.

In Taiwan, where events in Ukraine continue to be watched with great trepidation, on-year growth of industrial production dropped to a 22-month low of 2.15% in March, having been as much as 18.1% last June. But year-on-year growth in Taiwan of retail sales rebounded to 4.8% in March after dropping to 0.2% in February from 6.3% in January.

Brazil also offered another example highlighting the short-lived initial shock to household confidence from Russia’s initial invasion of Ukraine. Brazilian consumer confidence revived in April to an 8-month high.

The Chicago Fed National Activity index slipped 0.1 point to a 3-month low in March.

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


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