Shortlived Equity Rally, More Inflationary Reports, and Day One of an Historic FOMC Meeting

May 3, 2022

Tech stocks had rallied in the final hour of Monday trading, but futures point to a likely drop of at least 0.5% at the start of Tuesday’s session. Share prices fell 0.9% in New Zealand, 0.6% in Taiwan, 0.4% in Australia, and are down 0.8% in the U.K., whose market had been closed for holiday yesterday.

Many Asian markets observed holidays today, including Japan, China, India, Indonesia, Singapore, Vietnam, Malaysia, Pakistan, and the Philippines.

A two-day FOMC meeting today and tomorrow is highly likely to yield the first interest rate hike of more than a quarter percentage point since May 2000. Meanwhile, the Reserve Bank of Australia today engineered its first interest rate increase of any size since November 2010, raising the Official Cash Rate by a greater-than-expected 25 basis points to 0.35%. Governor Lowe released a statement that asserts officials are “committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead.” CPI inflation accelerated from 1.1% a year ago to 5.1% now and is projected to exceed the target ceiling of 3% by a factor of two this year. A return to target is desired by mid-2024, and while much of the rise in Australian inflation is attributed to external factors, the statement concedes that some of the problem reflects domestic factors like a tightened labor market.

The Central Bank of Armenia also announced its latest interest rate decision today, leaving its refinancing rate unchanged at 9.25%. At meetings in February and March, such had been raised by a total of 150 basis points.

The backdrop to nervous stock market trading and the keen focus on central bank activity has been persistent inflation that caught most analysts in the private and public sectors around the world by surprise. There is scant recent precedent for inflation that has run up this high that didn’t elicit sharply tighter monetary policy and an eventual recession.

Throw into this mix a horrific war involving big populations and the risk that WMD may be used, and one has a recipe for dollar strength. The DXY weighed dollar index dipped 0.1% on balance overnight but is trading near the top of its 15-hour corridor. The dollar’s main loss was against Australia’s currency following the larger-than-anticipated Reserve Bank of Australia rate hike. Australia’s interest rate benchmark had been at a record low of 0.10% since November 2020, remains 40 basis points below its pre-pandemic level, and seemingly has plenty of additional scope for moving up. The dollar separately fell 1.7% against the ruble, but shows now net movement overnight against the yen, loonie or sterling and a 0.1% uptick relative to the euro.

The price of West Texas Intermediate oil fell 1.4% overnight amid worries about global demand, and gold is 0.2% softer. The ten-year British gilt yield climbed five basis points, while its U.S. and German sovereign counterparts are down two and one basis points.

Today’s inflation news features another record high in Euroland producer price inflation, which accelerated 5.3 percentage points to 36.8% in March. The on-year rise energy at the producer price level leaped to 104.1% from 87.3% in the prior month, while non-energy producer prices rose to 13.6% in March from 12.3% in February.

South Korean consumer price inflation of 4.8% in April was up from 4.1% in March, twice the target of 2.0%, and the highest such has been in somewhat over 13 years.

CPI inflation in Kazakhstan accelerated to a 67-month  high of 13.2% this month, and Belgian PPI inflation in March of 39.4% was the most ever and up from 8.0% a year earlier.

Hong Kong’s economy has suffered through some huge headwinds in recent years such as China’s crackdown on personal freedom in this former British colony and the war in Ukraine. The greatest threat lately has been China’s extreme policy approach to stamping out Covid, regardless of any economic consequences. A much larger-than-forecast 2.9% quarterly slide of Hong Kong GDP in 1Q 2022 resulted in a swing in the year-on-year growth rate to a six-quarter low of minus 4.0% from +4.7% in the final quarter of 2021. Personal consumption (-5.4%) and business investment (-8.3%) accounted for the bulk of the on-year contraction of GDP.

Unemployment in the euro area slid to a record low of 6.8% in March from 8.2% a year earlier.

Today’s U.S. data menu includes the released of factory orders, auto sales, and the JOLTs index of job openings and separations.

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

 

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