Lots of Financial Market Churning and Central Bank Activity

June 16, 2022

Federal Reserve officials settled on a 75-basis point rate hike in the past week. Chairman Powell anticipates another increase of 50-75 basis points after the July 26-27 policy review, and updated forecasts put a 3.25-3.5% federal funds rate in play by the end of this year. The baseline projections depict a soft economic landing, but Powell called the tasks of reducing inflation to target without involving a recession more challenging than before.

Many other central banks also lifted their policy interest rates yesterday or today. Lockstep increases in Hong Kong (75 basis points), Macau (75 bps), Bahrain (75 bps), Qatar (25 bps), Saudi Arabia (50 bps), and the United Arab Emirates (75 bps) were necessitated by currency management that links their domestic currencies to the U.S. dollar.

A quarterly scheduled policy review at the Central Bank of China (Taiwan) resulted in this year’s second increase of the discount rate, this time by 12.5 basis points to 1.50% after a 25-bp hike at the prior review in March. The rate had been cut early in the pandemic by 25 basis points. At 1.5%, the new rate level is at its most elevated level since the second quarter of 2016. Taiwanese CPI inflation rose to a 117-month high of 3.39% in May.

The Central Bank of Brazil‘s Selic rate was unanimously raised by another 50 basis points to 13.5%. Brazil is one of several Latin American countries with a legacy of past inflationary blowouts and has to be very careful in the current global environment. From a pandemic low of 2.0% up to March 2021, the Selic rate was lifted by a total of 725 basis points over the rest of last year, and that tightening was followed by increases in 2022 of 150 basis points in February, 100 bps in both March and May and now 50 by 50 basis points to 13.25%. Copom, the central bank’s policy committee, released a statement which states:

The Committee considers that, given its inflation projections and the risk of a deanchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into even more restrictive territory. The Committee emphasizes that it will persist in its strategy until the disinflation process consolidates and anchors expectations around its targets. For its next meeting, the Committee foresees a new adjustment, of the same or lower magnitude. 

In the wake of the Fed’s larger rate hike, some analysts had speculated that the Bank of England’s scheduled policy review yesterday and today would result in a bigger rate increase than the four previous 25-basis point moves, and three of six policymakers voted for a 50-bp hike, but the majority stuck with an incremental change of +25 basis points to 1.25%. More increases lie ahead, and the significant number of dissenters may indeed be flagging a coming shift to larger incremental changes.

Not all of the excess inflation can be attributed to global events. There has also been a role for interactions with domestic factors, including the tight labor market and the pricing strategies of firms. Consumer services price inflation, which is more influenced by domestic costs than goods price inflation, has strengthened in recent months. In addition, core consumer goods price inflation is higher in the United Kingdom than in the euro area and in the United States.

Today’s biggest central bank surprise came from the Swiss National Bank, where inflation is at its highest since September 2008 but tame at 2.9% compared to inflation in other countries. Swiss officials have kept very low interest rates in order to keep the Swiss franc from climbing to very overvalued levels. For several years prior to January 2015, the central bank used automatic forex intervention to cap the currency at 1.2 per euro. When that fixed parity was then lifted, the policy was slashed by 75 basis points to negative 0.75%, and market analysts weren’t expected a change at this month’s scheduled quarterly policy review. But Swiss officials concluded that Swiss GDP is likely to expand by 2.5% this year in spite of the Ukraine war and other depressants and decided to embark on a rate tightening cycle, starting with a 50-basis point increase to -0.25%. Revised CPI inflation projections highlight the urgency of stopping inflation’s climb. CPI inflation is projected to crest at 3.2% next quarter, instead of at 2.2%. Whereas officials were projecting inflation back below 1.0% by the second quarter of 2023, the new forecasts predicts it will be then at 1.9%  and foresee such slightly above 2.0% in the first quarter of 2025.

In market action, the weighted DXY dollar index touched a multi-year high on Wednesday and is unchanged so far today. Movements overnight against individual other currencies have been mixed, with gains of 1.3% against the peso, 0.7% versus the kiwi, 0.8% relative to sterling, 0.6% versus the Aussie dollar, 0.5% against the Turkish lira, and 0.4% relative to the loonie and euro. There have also been dollar declines of 2.1% against the Russian ruble, 1.4% versus the Swiss franc and 0.8% relative to the Japanese yen.

Equities are again getting beat up, with U.S. SPX and DJIA futures down about 2% and the Nasdaq pointing to a drop closer to 3%, which would put such over 30% below its cyclical peak. Equities have lost over 3% in Italy and Switzerland and fallen more than 2.0% in Germany, France and the U.K.. Share prices closed down 2.2% in Hong Kong and 2.0% in India but rose 0.7% in Japan were monetary stimulus remains a full-speed ahead commitment.

Ten-year sovereign debt yields have leaped 16 basis points in the U.S., 18 bps in Switzerland, 13 bps in the U.K., but only one basis point in Japan. An unscheduled meeting of the ECB Governing Council yesterday took steps to protect members like Italy with high debt commitments from financial distress as interest rates climb generally. While the 10-year German bund yield is 17 basis points higher today, its counterparts in Greece and Italy show rises of 10 and 13 basis points.

The price of a Bitcoin slumped 6% overnight and is 69% below its 52-week high. West Texas Intermediate oil dropped 1.2% overnight, but gold is little changed.

The soaring cost of imported energy and food ballooned Japan’s seasonally adjusted trade deficit to JPY 1.93 trillion in May from JPY 862 billion in January. In January-May, the unadjusted deficit totaled JPY 6.448 trillion, a steeply adverse swing from a surplus of JPY 478 billion in the first five months of 2021.

Import price inflation in South Korea accelerated to a new high of 36.3% last month.

Australia’s labor market in May was tighter than imagined. the jobless rate remained at a record low of 3.9%, and full-time employment jumped by a greater-than-expected 69.4k. Labor market participation rose, too.

Italian CPI inflation of 6.8% last month was the most in 434 months. Czech producer price inflation of 27.9% in May was the most since early 1992.

However, Chinese house price data showing the first year-on-year decline since September 2015 further highlighted the general underperformance of that key economy amid President Xi’s zero-tolerance approach to Covid.

GDP in New Zealand unexpectedly contracted 0.2% last quarter, trimming year-on-year growth to 1.2%.

Among released U.S. economic statistics, new U.S. jobless insurance claims last week were the most since the final week of January, the Philly Fed manufacturing index unexpectedly fell below a zero reading, and May monthly drops of 14.4% in housing starts and 7.0% in building permits were each greater than forecast.

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




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