ECB Steals Some Attention from the Fed

June 15, 2022

An unscheduled meeting of the European Central Bank Governing Council has been underway for a bit over two hours to consider the bond market selloff and increasing fragmentation of that market that saw a 242-basis point spread at the close of Tuesday trading between 10-year Italian and German sovereign debt yields. That hasn’t be so wide since the earliest days of the Covid pandemic, and the big concern is that monetary tightening to restore price stability risks a debt crisis like the one in 2010-11 that threatened to break the euro up.

Today’s thunder was to have come from the Federal Reserve and may ultimately do so. The Federal Open Market Committee is wrapping up a two-day review of policy, and investors are bracing for the possibility of an interest rate hike that could exceed half a percentage point for the first time since a 75-basis point hike from 4.75% to 5.50% in mid-November 1994. Monetary officials will be updating their forecasts and announce the new projections in conjunction with a released policy announcement at 18:00 GMT (14:00 EDT). Chairman Powell’s press conference will begin a half hour later.

News of an unplanned unplanned ECB meeting has given respite to recent financial market trends such that

  • Ten-year sovereign debt yields today have fallen back 31 basis points in Italy, 17 bps in Portugal, 15 bps in Spain, 14 bps in the U.K., 12 bps in France, 10 bps in the United States, but just 8 bps in Germany. The 10-year Japanese JGB yield ticked 1 bp higher, in contrast.
  • From a multi-year high of 105.65 during Tuesday, the weighted DXY dollar index has retreated 0.8% to 105.78.
  • Compared to closing levels yesterday, the dollar has depreciated 3.1% against the Russian ruble, 1.1% versus the Aussie dollar,0.9% relative to the yen and sterling, 0.7% vis-a-vis the euro, 0.6% against the kiwi, 0.4% versus the Swiss franc and Chinese yuan, 0.2% against the loonie and 0.1% relative to the Mexican peso.
  • Stock markets in Europe are up today so far by 2.6% in Italy, 1.3% in the U.K., 1.0% in Germany and Spain, and 0.8% in France. Equities in the Pacific Rim had closed down 1.8% in South Korea, 1.3% in Australia and 1.1% in Japan but also up 1.1% in Hong Kong and 0.5% in China after better-than-feared Chinese data were reported. U.S. stock futures point to a rose of about 0.5% at the open.
  • Among commodities, the prices of WTI oil has dropped 1.3%, while that of gold rose 0.7%.
  • Despite some bottom-fishing in Bitcoin trading after the ECB news flash, its price still shows a 5.3% net dive so far today, and it is around 58% below its level at the start of 2022.

Chinese industrial production rebounded to a 0.7% on-year rise in May. That’s 1.4 percentage points better than analysts were anticipating. A 3.3% rise in January-May from a year earlier compares to an average 9.6% increase in 2021. Lockdowns to stamp out Covid have begun to relax.

Chinese retail sales posted their third straight year-on-year decline, but May’s slide of 6.7% was smaller than forecast and less than drops of 11.1% in in April and 8.5% in March.

Chinese fixed asset investment in January-May was 6.2% above the average in the first five months of 2021, and China’s unemployment rate, which had spiked from 5.0% in January to a 26-month high of 6.1% in April, settled back to 5.9% in May.

The release of Japanese machinery orders data also surpassed expectations. Analysts were predicting a 1.5% monthly drop in core domestic private orders but instead learned that such had leaped 10.8% in April. Export orders soared 52.1% on month and 38.2% on year. A separate Japanese economic data report measuring service sector activity went up 0.7% in April and was 0.3% above its year-earlier level.

Plenty of disappointing price data were reported around the world this Wednesday.

  • French consumer price inflation last month was confirmed to be at a 439-month high of 5.2% as reported originally.  That’s up from 1.4% in May 2021.
  • Polish CPI inflation, a 295-month high of 13.9% in May, was up from 12.4% in April and 4.7% in May 2021.
  • Croatia registered record high 10.8% CPI inflation in May versus 2.1% a year earlier.
  • Bulgarian CPI inflation of 15.6% in May was the most in 24 years and up from 2.5% a year earlier.
  • The combined Swiss PPI/import price index posted a 6.9% 12-month rate of increase last month, most in 488 months and up from 3.2% registered in May 2021. Import prices climbed 11.9%, and domestic producer prices were 4.4% higher than a year earlier.
  • Argentine consumer price inflation of 60.7% last month was the most in 364 months.

Industrial production in the euro area increased 0.4% in April, but the pivotal capital goods component dipped 0.2% further and was 9.0% below its year-earlier level. Moreover, industrial production posted a 2.0% drop from the level in April 2021, marking the largest 12-month decline in a year and a half.

Russia’s invasion of Ukraine has hammered Euroland’s trade balance, resulting in a EUR 31.7 billion seasonally adjusted deficit in April after shortfalls of EUR 17.8 billion in March and EUR 12.5 billion in February. The unadjusted January-May deficit of EUR 85.1 billion contrasts with a surplus of EUR 71.7 billion during the first five months of 2021. A deficit in net energy commerce ballooned to EUR 183.6 billion from EUR 66.8 billion a year earlier.

India’s $24.29 billion trade deficit in May was the widest gap ever and reflected a near-63% on-year surge in imports.

Consumer confidence in Australia tumbled progressively from 108.8 last July to a 26-month low of 86.4 last month, according to the Westpac measure.

Officials at the Central Bank of Namibia have authorized this year’s third and so far largest policy interest rate hike, a move of 50 basis points. At 4.75%, the new rate level is a full percentage point above its pandemic low. The move is needed to support the country’s currency link to the South African rand.

The news from Eastern Ukraine continues to be discouraging, and yesterday’s batch of U.S. primary election results underscore widening political polarization that threatens to leave America unprepared to address a coming recession that will be the cost of restoring price stability.

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

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