Central Banks in India and Iceland Jump the Gun on Fed

May 4, 2022

A 50-basis point interest rate hike later today is virtually baked into the Federal Open Market Committee decision. The last hike of more than 25 bps was in May 2000. Analysts anticipate forceful forward guidance language as well. The announcement is set for 14:00 EDT (18:00 GMT), and Chairman Powell’s press conference begins 30 minutes later. This is not one of the meetings when macro forecasts are to be updated.

The Reserve Bank of India at an unscheduled meeting but by unanimous vote raised its repo rate to 4.40% from 4.0%. That’s the RBI’s first rate increase since a 25-basis point hike to 6.5% in August 2018 and reverses the last change, which was a 40-bp cut in May 2020. In a released statement, the policymaking committee wrote that it “the MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects.” Officials employ a wide medium-term target band for CPI inflation of 2-6%, which is now exceeded by a percentage point. The statement also worries about significant headwinds to growth, concluding that ” the Indian economy appears capable of weathering the deterioration in geopolitical conditions but it is prudent to continuously monitor the balance of risks.”

Officials at the Central Bank of Iceland have been more aggressive than their RBI counterparts in meeting the challenge of soaring inflation, but they needed to be given the low starting seven-day term deposit rate level of 0.75% reached during 2020. Beginning in May 2021, five rate hikes prior to today had been engineered, totaling two percentage points. Today’s 100-basis point rate hike to 3.75% was the most aggressive tightening yet and was accompanied by a promise to increase the interest rate even higher. CPI inflation is projected to crest above 8% next quarter and not return to 3% until 2024.

There was little net movement in the dollar overnight, as investors await the Federal Reserve’s decision. The greenback slid 0.1% against the euro and sterling, lost 0.2% against the yen, but inched 0.1% higher versus the Swiss franc. A larger 1.2% drop occurred against the Russian ruble, aided by that economy’s manufacturing purchasing managers survey, which revealed a slower rate of contraction in April than March. The PMI rebouned 4.1 points but remained south of the 50 breakeven level between expansion and contraction.

U.S. stock futures are modestly in the black, in contrast to equity market losses that have occurred in India of 2.3% and Hong Kong of 1.1% as well as smaller declines so far in Europe’s major stock exchanges. Several markets remained closed today for holiday, including Japan, China, Indonesia, Malaysia, and Pakistan.

The price of WTI oil leaped 4.2% on concerns the EU may impose a full stoppage of Russian oil imports. Gold is little changes. Among ten-year sovereign debt yields, there’s been a 2-basis point dip in the U.S. instance but 1-basis point upticks in Germany and Great Britain.

U.S. politics have been shaken by two developments. It’s unclear whether yesterday’s shocking leaked revelation of a preliminary Supreme Court predisposition to overturn federal abortion law will mobilize Republican or Democratic Party voters the most. Historically, Republicans are more likely to treat abortion as a pure litmus test, regardless of all other issues, and they have been more disciplined about getting out the vote. However, more is at stake now for Democrats and women. Today’s shocker is the size of J.D. Vance’s victory in the Ohio senate primary vote, which underscores just how tight former President Trump’s grip remains on the Republican Party.

In other purchasing manager April surveys out today,

Euroland’s service sector and composite PMI indices improved to 8- and 7-month highs of 57.7 and 55.8, attesting to surprising economic resilience in the face of Russia’s invasion of Europe and sanctions that will hurt EU exporters. The French services and composite PMIs were revised up a bit and constitute 51-month highs. The Italian and Spanish composite PMIs rose to 4- and 2-month highs, but Germany’s composite index slid to a 3-month low. It should be noted too that inflation intensified in April, so while the data if maintained imply GDP growth in the second quarter of around 0.7% (not annualized), pricing pressure suggests that growth is more likely to slow in the rest of the quarter.

Australia’s composite and service sector PMI indices improved to 2-month highs of 56.1 and 55.9, but the construction PMI of Australia fell back 0.6 points below March’s 4-month high of 56.5.

Sweden’s composite PMI score of 64.4 rebounded 3.2 points to a 2-month high, and the service’s reading of 68.1 was at a 3-month peak.

Indonesia’s manufacturing PMI rose to a 3-month high in April of 51.9.

Vietnam’s manufacturing PMI was unchanged from March’s 5-month low of 51.7.

Retail sales in the euro area fell 0.4% on month in March, reversing February’s increase fully and resulting in the smallest year-on-year rise of sales (just 0.8%) in a year. Sales volume dropped 1.9% in France and 0.1% in Germany from their February levels.

New Zealand quarterly labor market data were reported today. On-year growth in the labor cost index of 3.0% in the first quarter of 2022 was up from 2.6% in the final quarter of 2021 1.6% in the first quarter of last year. A jobless rate of only 3.2% matched the prior quarter’s record low.

Germany’s chronic merchandise trade surplus is being severely squeezed by the Russian war. The seasonally adjusted surplus slumped to EUR 3.2 billion in March from EUR 11.1 billion in February, and the unadjusted surplus of EUR 9.7 billion in March was down from EUR 20.7 billion in March 2021. Exports to Russia dived more than 60%.

Australian retail sales in March climbed 1.6% on month. Along with advances of 1.6% in January and 1.8% in February, sales recovered all of December’s drop to surpass the previous record level set in November.

Mexican consumer sentiment improved last month to a 4-month high.

Two dismal U.S. data releases arrived today. ADP’s estimate of private jobs growth last month tumbled 48% to 247K. Analysts were expecting a rise of about 400k after a monthly average in the first quarter of 531k. The latest figure represents the smallest rise in two years. The other piece of news was a record monthly goods and services trade deficit of $109.8 billion, up from $89.8 billion in February and $89.2 billion in January. For trade in just goods, the deficit widened 19% to $128.1 billion.

Canada experienced a third straight trade surplus in March, but at C$ 2.49 billion it was 19% narrower thanĀ  in February.

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

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