Inflation Rising, Central Bankers Reacting, Dollar Firmer, and Equities Troubled

June 10, 2022

The dollar rose overnight by 0.4% against sterling and 0.2% relative to the euro, Swiss franc, and in weighted terms. The dollar alternatively dropped against the ruble, Australian and New Zealand dollars and Japanese yen.

Following yesterday’s sharp drop in U.S. share prices, equities fell 1.5% in Japan, 1.3% in Indonesia and Australia, 1.6% in India, and 0.8% in South Korea. The reaction of European stock markets was augmented by yesterday’s signal of pending tightening by the European Central Bank. Losses so far today include drops of 3.7% in Italy, 2.3% in Spain, 1.7% in France, 1.5% in Germany and 1.2% in Great Britain.

The price of WTI oil is 0.7% higher. That of gold is 0.4% softer in keeping with a generally firm dollar.

Ten-year U.S. Treasury and British gilt yields eased a basis point, and their German counterpart is two basis points lower.

U.S. consumer price data will be released within the hour. Meantime, other inflation news out today include

  • A 1.8 percentage point rise in Czech consumer price inflation to a 341-month high of 16.0% last month compared to 2.9% a year earlier.
  • Danish CPI inflation of 7.4% last month was 0.7 percentage points higher than in April and at a 468-month high. CPI inflation has risen from 1.7% in May 2021.
  • A 401-month higher in Norwegian CPI inflation of 5.7% in May compares to 5.4% in April and 2.7% in May 2021. Norwegian producer prices soared 64.6% between May 2021 and last month. Still, that was down from record high PPI inflation of 79.4% reached in March.
  • Japanese on-year domestic PPI inflation has been 9.0% or higher each month so far this year, but the 9.1% reading in May was down from 9.8% in April and the lowest since January. Import prices and export prices during May were respectively 43.3% and 16.7% above their year-earlier levels.
  • Spanish CPI inflation in May was confirmed at the preliminary estimate of 8.7%, up from 8.3% in April but below 9.8% in March, which had been the highest reading since May 1985.
  • Romanian CPI inflation of 14.5% in May constituted a 222-month high and was up from 13.8% in April and 3.75% in May 2021.
  • Chinese CPI inflation of 2.1% last month matched April’s 5-year high. A 2.3% on-year increase in food prices was the most in 20 months. Chinese producer price inflation fell to a 14-month low of 6.4%, however.

Yesterday’s scheduled meeting of the European Central Bank’s Governing Council made news, pre-announcing a likely 25-basis point rise in policy interest rates (currently a zero percent refinancing rate flanked by a negative 0.5% deposit rate and a 0.25% marginal lending facility rate). In addition, a released statement flagged a likely rate hike of more than 25 basis points at September’s policy review, and additional increases at ensuing reviews.

High inflation is a major challenge for all of us. The Governing Council will make sure that inflation returns to its 2% target over the medium term. In May inflation again rose significantly, mainly because of surging energy and food prices, including due to the impact of the war. But inflation pressures have broadened and intensified, with prices for many goods and services increasing strongly.

The ECB asset purchase program will end next month, and officials released revised CPI and GDP forecasts, which is done quarterly. Projected CPI inflation was bumped up to 6.8% for 2022 from estimates of 5.1%, 3.2% and 1.7% made last March, December and September. Core CPI of 2.3% on average in 2024 now is expected to exceed target throughout the forecast period. Officials reduced their forecast of GDP growth this year to 2.8% from estimates of 3.7% made in March and 4.2% assumed last December. A recession is not predicted.

The Central Reserve Bank of Peru also raised its policy interest rate yesterday. The size of the hike, like ones each month since September 2021, was by 50 basis points, and the new rate level of 5.5% compares to 0.25% a year ago. Peruvian CPI inflation last month rose to 8.1%, most since 1998, but officials believe the cresting point will be hit this month. Officials implied that monetary policy normalization in Peru is still ongoing, so more increases are highly likely.

The Central Bank of Russia, unlike most other monetary authorities around the world, is marching to a different drum, and the irony is that Russia’s ruthless destruction of Ukraine — a major producer of both energy and food — is a major reason for the rise of world inflation. Two rate hikes by Russian officials last February lifted the policy rate from 8.5% to 20%. But thanks to that quick action and the imposition of capital controls, the Russian ruble at 57 per dollar currently has appreciated past its pre-invasion level, and this has enabled the central bank’s interest rate to be lowered by leaps and bounds. Three 300-basis point cuts between April 18 and May 26 were followed today by an announced larger-than-expected 150-basis point reduction to 9.5%. A released statement after today’s action asserts that inflation is dropping faster than expected two months ago and that economic activity has not declined as much as feared. Russia’s next scheduled monetary policy review will be on July 22.

Among other data reported abroad today, Chinese bank lending rebounded last month to 1.89 trillion yuan and was accompanied by a 11.1% on-year advance in the stock of  M2 money; Italian industrial production growth of 1.6% on month in April far exceeded expectations; Turkish unemployment rose to a 3-month high of 11.3% in April; South Korea recorded its first current account deficit in two years during April; and Austrian industrial output recorded its second largest 12-month rate of increase (9.1%) in April since June 2021.

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

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