Risk Aversion Returns

May 18, 2022

It’s not surprising that the investor move back into riskier assets over the prior three sessions proved to be short-lived because the reasons behind this year slide in equities and rise of the dollar hadn’t disappeared.

The three main U.S. stock market indices are down 0.5-1.0% in futures trading. Smaller dips have occurred in Europe. Earlier, share prices in the Pacific Rim closed up 1.0% in Australia, 1.5% in Taiwan, 1.1% in New Zealand and 0.9% in Japan. It’s common for Asian markets to take their cue from the prior day’s tone in North America.

Ten-year German bund and U.S. Treasury yields rose three and one basis points overnight.

Among commodities, WTI oil climbed 1.6%, and gold fell 0.4%.

The weighted DXY dollar index strengthened 0.3%. The dollar is also up 0.3% against sterling, the Turkish lira and the euro but down 0.2% relative to the yen and Mexican peso. The Russian ruble lost ground as monetary officials there began to relax capital controls imposed at the start of the war to support the exchange rate.

First-quarter GDP data were released in Japan, showing a smaller-than-feared 1.0% quarter-to-quarter contraction. Japan experienced alternating expansions and contractions over the past five quarter, and GDP last quarter was on balance only 0.2% above its level in the first quarter of 2021. GDP last quarter got no positive support from personal consumption  or residential investment, and net foreign demand exerted a 1.7 percentage point drag on GDP growth. Inventories provided the largest impetus to growth. The GDP price deflator posted a fifth consecutive year-on-year change, but that inflation indicator in 1Q 2022 (0.4% down from 1Q 2021) was the least deflationary in the past year.

Euroland CPI inflation in April was revised down 0.1 percentage point to a still-record high 7.4% and 5.8 percentage points higher than inflation of 1.6% in April 2021. 7.4% was also March’s inflation rate. While the energy price component eased to a 12-month 37.5% rate of increase from 44.3% the month before, food price inflation accelerated to 6.3% from 5.0%, non-energy industrial goods climbed to a 5.0% price change from 3.4%, and services increased to 3.3% from 2.7% in the prior month.

British CPI inflation leaped two percentage point to 9.0% in April from 7.0% in March and 1.5% in April 2021. It’s been four decades since inflation was as high as 9.0%.

British producer output price inflation jumped 2.1 percentage points to 14.0% last month and producer input price inflation of 18.6% matched the record high touched in March.

Likewise, CPI inflation in South Africa of 5.9% was also unchanged from March’s 3-month¬† high.

The year-on-year rise of 2.4% in Australia’s quarterly wage cost index was the biggest advance in 13 quarters.

Austrian CPI inflation of 7.2% last month was its highest in 486 months and up from 1.9% a year earlier.

Portuguese PPI inflation settled back to 24.6% last month from 26.5% in March and 20.9% in February but was five times greater than the pace in April 2021.

Canadian CPI inflation of 6.8% in April was a tad more than forecast and twice the 3.4% 12-month rate of increase through April 2021. Core inflation ticked 0.2 percentage points higher to 5.7%.

Chinese property prices were just 0.7% greater than a year earlier in April, marking their smallest such advance in 78 months.

Two central bank policy interest rates were raised today today. The Central Bank of Tunisia’s 75-basis point increase to 7.0% was its first increase since 2019. CPI inflation in Tunisia of 7.5% currently is at a 162-month high and only half a percentage point above the new policy interest rate level. In Uruguay, central bank officials began raise their policy rate from a base of 4.5% last August. Today’s increase of 75 basis points was the third such rise this year, and an even larger hike of 125 basis points was engineered at the prior meeting in April. At 9.25%, the new policy rate is marginally below April’s year-on-year 9.4% rate of CPI inflation.

U.S. housing construction has become less dynamic under the weight of higher interest rates. The 30 year mortgage rate is hovering around a 12-year high of 5.5%, and mortgage applications underwent their biggest weekly drop (11%) last week since February. Housing starts in April dipped 0.2% but remained 14.6% above their year-earlier total. But building permits not only sank 3.2% in April but were just 3.1% greater than in April 2021.

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

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