Reality Sinking In

May 6, 2022

The Federal Reserve is really in a tough spot, and the bump in optimism when Chairman Powell disclosed there had been no discussion of raising rates by more than 50 basis points proved short-lived. It’s going to be very hard to get inflation back to target without at some point steepening the rise of interest rates, and the possibility of a recession by 2023-24 is greater than officials admit. Fact is policymakers just don’t predict recessions before they come. It’s bad PR.

The DOW dropped more than 1000 points yesterday, and the Nasdaq lost 5% on that single day. There’s still one big event this week, the release of U.S. labor market statistics. Non-farm payroll growth is expected to be lower but still sufficient to leave the main takeaway that the labor market is way too tight. Moreover, the jobless rate may dip further. U.S. stock futures are currently down. Today’s employment data, particularly average hourly earnings, may have to be notably softer than forecast to elicit bottom-fishing in the market.

In other equity action overnight, share prices closed down 3.8% in Hong Kong, 2.2% in Australia and China, 1.6% in India, 1.7% in Taiwan, 1.6% in Singapore, and 1.2% in South Korea. The maverick in Asia was the Japanese Nikkei, which rose 0.7%, but selling pressure has prevailed in Europe and been widespread with losses so far of 1.2% in France and 1.0% in Germany.

As for the dollar overnight, the DXY weighted dollar index touched its highest level since November 2002 early on but currently sports a 0.5% decline on balance this Friday. The dollar has fallen 0.5% as well against the euro, 0.2% versus the Swiss franc and 0.1% against the Canadian dollar and sterling. There’s been dollar advances of 3.5% against the Russian ruble, 0.5% relative to the Turkish lira, 0.3% vis-a-vis the Chinese yuan and 0.1% against the Australian dollar and Japanese yen.

Ten-year sovereign debt yields have risen four basis points today in Germany, the United States, the Netherlands and Italy and by three basis points in Spain and France.

WTI oil surged a further 2.1%, cracking through the $110 per dollar barrier, and the price of gold increased 0.4%. But the woeful Bitcoin is 1.6% weaker.

Even Japan is catching a whiff of inflation. Tokyo consumer price inflation, which gets reported a month ahead of national figures and tends to be a bellwether of such, accelerated on a core basis (i.e., excluding fresh food) to a 9-year high of 1.9% in April from 0.8% in March. Energy and food prices were 24.6% and 4.3% higher than in April 2021. A separate Japanese data releases showed a further slowdown in the monetary base to a 12-month 6.6% rate of rise in April from 8.0% in 1Q 2022 and 15.9% on average in 2021. The base is what Bank of Japan policy most directly controls.

More evidence emerged of the particularly large shock to Germany of the Ukraine war. A 4.7% monthly slump in March of industrial orders was reported Thursday, and today brings news that German industrial production, which had risen five straight months through February, fell by 3.9% in March. A 3.5% drop compared to March 2021 was the largest 12-month rate of decline in 25 months.

Today’s batch of purchasing managers survey releases revealed continuing growth in most cases:

  • A 3-month low in the British construction PM index to a still robust reading of 58.2.
  • Rebounds in April to 2-month lows in Russia’s service sector and composite PMIs of 44.5 and 44.4. The respective reading had swooned during March to 22-month lows of 38.2 and 37.7.
  • The AIG-compiled Australian services PMI fell 1.6 index points to a 2-month low of 57.8.
  • Singapore’s private sector PMI rebounded nearly four index points to a 47-month high of 56.7.

Producer price inflation in Croatia accelerated 2.4 percentage points to a record high of 21.9% in April.

Taiwanese CPI inflation of 3.38% in April was low from a global standpoint but at a 116-month high in that country’s own historical context. Furthermore, PPI inflation in Taiwan jumped another 0.9 percentage points to a 6-month high of 15.1% last month.

The Reserve Bank of Australia, which earlier this week had raised its Official Cash Rate for the first time since November 2010, published its quarterly Monetary Policy Statement in which core CPI inflation this year is revised two percentage points upward. Wage inflation is also expected to rise, unemployment is still falling, and the report identifies a clear need for a “further lift in interest rates.” In-target inflation may not be restored until 2024.

In British local elections yesterday based on incomplete results thus far, Prime Minister Johnson’s Conservative Party has lost several previously solid seats in London but had done much better in other places. The U.K. Halifax house price index posted a third straight double digit year-on-year increase — +10.8% in April. The month-on-month increase was 1.1%.

Spanish industrial production fell 1.8% in March, its third monthly decline in four months and was just 0.1% above its year-earlier level. Swedish industrial production rose 0.4% on month and 0.8% on year in March.

Italian retail sales sank 0.5% on month in March but 5.6% above its year-earlier level.

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

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