Thursday’s Focus Turns to Central Banks

May 26, 2022

The dollar slid overnight by 0.2% against the euro, yen, sterling, and Mexican peso and by 0.1% versus the Swiss franc and on a weighted basis. Alternatively the U.S. currency advanced 0.6% relative to the Chinese yuan, 0.3% relative to the Russian ruble, and 0.2% vis-a-vis the Turkish lira. The kiwi, Aussie dollar and Canadian dollar remain unchanged.

U.S. share prices in overnight futures trading extended their recent upturn. Equities were mixed in the Pacific Rim, with losses of 0.8% in Taiwan, 0.3% in Japan and 0.7% in Australia and New zealand but rises of 0.5% in China and 0.9% in India. The German Dax and Paris Cac have traded 0.8% and 0.7% higher, while the British Ftse shows a marginal downtick.

Ten-year sovereign debt yields have risen more sharply in the U.K. (4 basis points), Germany (3 bps) and Japan (2 bps) than in the United States (a single basis point).

WTI oil is 0.8% firmer, while the price of gold has slipped 0.3%. Bitcoin‘s price fell under $30,000 yesterday and has lost 1.4% so far today.

Minutes from the FOMC released yesterday afternoon solidified expectations for 50 basis point interest rate hikes at the next two meetings, but officials were not locked into an automatic path. They will watch many factors including how much financial markets tighten and see where the news takes them.

The Bank of Korea’s seven-day bank rate was raised again by 25 basis points. It was the fifth such increase since last August, the third one of 2022, and the second straight monthly meeting in which officials tightened. At 1.75%, the interest rate is back to the level prevailing between July and October of 2019. A released statement revises projected average CPI inflation this year up sharply to 4.5% from 3.1%. Inflation printed at 4.8% in April and is headed for the high 5% range later this year, but core inflation is hovering around 3%. The reduction of inflation going forward will command the central bank’s top priority “for some time.” Like the Fed, incremental increases of the interest rate may need to be stepped up.

Turkey’s monetary policy hasn’t been very independent since President Erdogan canned the central bank governor after a 200-basis point rate hike to 19% in March 2021. The rate was trimmed back by 500 basis points over the final four months of that year and has stayed at 14% all this year in spite of a meteoric rise of Turkish CPI inflation from 21.3% last December to 70% last month. Saying what the politicians want to hear, a released statement justifying the 14% one-week repo rate asserts that actions taken previously have made policy sufficiently tight. The rise of inflation reflects “rising energy costs resulting from geopolitical developments, temporary effects of pricing formations that are not supported by economic fundamentals, strong negative supply shocks caused by the rise in global energy, food and agricultural commodity prices. The Committee expects disinflation process to start on the back of strengthened measures for sustainable price and financial stability along with the decline in inflation owing to the base effect and the resolution of the ongoing regional conflict.”

In an unscheduled policy meeting at the Central Bank of Russia, officials implemented their third 300-basis point interest rate cut since April 8 and “holds open the prospect of key rate reduction at its upcoming meetings.” Economic growth in Russia appears to have slumped very sharply this quarter. The ruble plunged very sharply when Russia’s invasion of Ukraine elicited stiff economic and financial sanctions from the West. Rate hikes by Russia’s central bank totaling 1,150 basis points in February plus capital controls lifted the ruble from a low of 143.2 per dollar past the pre-invasion level to 56 per dollar. The timing of today’s further reversal of ruble support was likely prompted by the increasing likelihood of a Russian default on foreign debt for the first time since the early 1920s. Monetary officials also reacted to measures suggesting that expected inflation is starting to settle back.

The contraction of U.S. GDP last quarter versus the final quarter of 2021 has been revised to a marginally greater 1.5% from 1.4% estimated initially. Whereas personal consumption growth was faster than assumed, inventories showed a greater drag on growth now estimated at 1.09 percentage points. The biggest drag came from net exports (3.23 percentage points) but not revised much from the initial estimate. Real GDP grew 3.5% between 1Q 2021 and 1Q 2022. The total and core PCE price deflators were 6.3% and 5.2% above their year-earlier levels.

U.S. new jobless insurance claims last week of 210k were 8k less than in the week of May 14 and a bit below analyst expectations, but the 4-week average of new claims still rose to a 14-week high.

Japanese corporate service prices posted no monthly change in April, but their year-on-year inflation rate increased to a 26-month high of 1.7%.

South African producer price inflation jumped 1.2 percentage points to a greater-than-forecast 13.1%, most since at least before 2013.

Australian fixed asset business investment fell unexpectedly and by 0.3% last quarter, resulting in a significantly trimmed 4.5% four-quarter rate of increase.

Italian consumer confidence rebounded 2.7% above April’s 17-month low to a 3-month high, but manufacturing sector business confidence in Euroland’s third largest economy weakened somewhat in May to a 13-month low.

Irish consumer sentiment weakened to a 25-month low in May.

Turkish economic sentiment improved two index points in May to a reading of 96.7, still 6.3 points below last September’s high.

In Singapore, GDP growth in the first quarter was revised upward 0.3 percentage points to a 0.7% increase versus 4Q 2021 and to a 3.7% year-over-year pace.

Mexican retail sales rose 0.4% on month and 3.8% on year in March. and the Mexican current account last quarter swung to a deficit of $6.523 billion from a $2.741 surplus in the final quarter of 2021.

Monthly growth in Canadian retail sales during March was revised to zero percent from 1.4%, and early indications are that sales then rose 0.8% in April.

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

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