Following the Fed’s Lead to an Extent

May 5, 2022

Wednesday saw a post-FOMC rally in U.S. equities and commodity prices but a drop in the dollar and 10-year Treasury yield. The 50-basis point interest rate hike and the details regarding Fed balance sheet reduction were aligned with market expectations, but Powell’s press conference was more dovish than expected, especially his quelling of the possibility of rate hikes larger than 50 basis points.

Investors weren’t the only ones following the Fed’s lead. Monetary authorities in Hong Kong, Saudi Arabia, and the U.A.E. also raised interest rates by 50 basis points, and the Central Bank of Brazil’s Selic rate, which had been lifted by 725 basis points in 2021 and a further 250 basis points earlier this year, was hiked another full percentage point to 12.75%, reaching its highest level in five years. The Bank of Norway had implemented 25-basis point rate hikes in September, December and March and signaled after today’s policy review that not only is a fourth 25-basis point increase likely in June but that the possibility has increased that the central bank may quicken this established pace of monetary policy normalization.

Then there was the Bank of England Monetary Policy Committee’s turn, which had been expected to lift its Bank Rate by a further 25 basis points, a move that many investors worried might depress Britain’s economy unduly nonetheless. The Bank Rate was raised from 0.75% to 1.0%, its highest level in 13 years, but the surprise was the 6-3 vote, in which a third of the committee (Mann, Saunders, and Haskel) each favored a 50-basis point increase. This development is reminiscent of the prior FOMC meeting when Bullard dissented for a larger 50-bp hike, and as in the United States could be a harbinger of more aggressive monetary tightening by the BOE.

Financial markets this Thursday have lost some of the relief that Powell’s press conference created. U.S. stock futures have dropped 0.5-0.8%. The dollar has recouped ground as one would expected if investors believed the Fed is hellbent on stamping out inflation as quickly as possible, come what may. The weighted dollar index has risen 0.5% so far today and is currently trading near the top of its overnight range. The dollar shows advances of 1.5% against sterling, 1.0% versus the Aussie dollar, 0.8% relative to the kiwi and Swiss franc, 0.7% vis-a-vis the Japanese yen, 0.6% against the euro, 0.3% versus the Canadian dollar, and 0.2% relative to the Chinese yuan.

The Russian ruble’s 1.4% rise has been an exception, but its strength reflects capital controls, not underlying and fundamentally determined market forces.

The thing that hasn’t followed the Fed’s cue has been inflation itself. A slew of more purchasing manager surveys reported today highlight very elevated global inflation, and several individual country price data out today have attracted attention, too.

  • Turkish CPI inflation accelerated nearly 9 percentage points on month in April to a 242-month high of 70% due to a 7.3% month-on-month advance in prices. Turkish producer prices meanwhile were 121.8% above their year-earlier level, which constitutes 325-month high.
  • Cypriot CPI inflation leaped 1.7 percentage points in April to a 484-month high of 8.8%.
  • Swiss CPI inflation, although comparatively behaved at 2.5%, was for Switzerland its highest level in 162 months.
  • Filipino CPI inflation of 4.9% in April was the most in 40 months.

The war in Ukraine dealt a huge blow to the German economy, whose factory orders slumped 4.7% on month during March. That more than four times what analysts were forecasting and reflected drops of 6.7% in export orders and 1.8% in domestic demand.

French industrial production in March also undershot expectations, falling 0.5% versus February’s level and recording just a mere 0.1% rise compared to a year earlier.

Retail sales in Hong Kong posted successive year-on-year drops of 17.6% in February and 16.8% in March.

The latest batch of April purchasing manager surveys included a very worrisome Chinese service sector implosion due to Covid lockdowns there. The PMI index fell to 36.3, not quite as depressed as in February 2020 but otherwise the greatest rate of contraction since at least 2005. China’s composite PMI printed at 37.2 after 43.9 in March, 50.1 in February, and 55.0 at the end of 2021. April’s reading is the lowest since February 2020 when the pandemic was new and raging.

Britain’s services PMI reading in April of 58.9 was its lowest since December and accompanied by a 5-month low in the composite index.

Ireland’s service sector PMI dropped 1.7 points below March’s 5-month high to a 3-month low of 61.7 in April.

India’s composite and services PMI readings, by contrast, rose to 5-month highs of 57.9 and 57.6.

Turkey’s manufacturing PMI stayed below the 50 level that separates expansion from contracting activity. Such fell to a 23-month low of 49.2 in April from a 5-month high last August of 54.1.

The Standard Bank private purchasing managers index for South Africa fell 1.1 points to a 4-month low of 50.3.

The Malaysian, Hong Kong, and Singapore private PMI readings each rose last month to 4-, 5- and 2-month highs of 51.6, 51.7, and 50.3.

Amid rapidly rising inflation, a war next door, and continuing supply delays, Euroland’s construction PMI fell last month to a 7-month low of just 50.4 in Euroland. Just three months earlier, the index in January was at a comfortable 56.6. Within the euro area, the German and Italian construction purchasing manager indices fell to 8- and 6-month lows of 46.0 and 59.0. The French 50.7 score was at a 3-month high but conveys very subdued activity.

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


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