With Central Bank Policies in Today’s Spotlight, Tuesday’s Equity Rally Has Been Followed by Renewed Selling on Wednesday

June 22, 2022

Fed Chairman Powell delivers his semi-annual congressional testimony on U.S. monetary policy and the economy at 10:00 EDT (14:00 GMT) before the Senate Banking Committee. He is likely to strike a hawkish tone, prioritizing the goal of reducing inflation and halting the upward creep of expected inflation.

The quarterly review of the Swiss National Bank’s monetary policy ended with an unexpected 50-basis point increase of the policy interest rate to -0.25%. The rate had been at -0.75% since January 2015, and this was the first increase since 2007. A released statement opines that more rate hikes are likely and reaffirms the practice of intervening as needed to counter upward pressure on the overvalued Swiss franc. Interest rate hikes are “aimed at preventing inflation from spreading more broadly to goods and services in Switzerland.” Officials conceded that even with this shift to a less accommodative stance, inflation will significantly exceed previous expectations. CPI inflation is projected now to crest at 3.2% next quarter instead of the previous estimate of 2.1% then. Even in the third quarter of 2023, they now expect inflation to be at 1.5%, not the prior forecast of 0.7%, and inflation is seen accelerating in the final year of the forecast horizon and, at 2.1% in 1Q 2025, exceeding target.

The Central Bank of Iceland raised its policy rate today by a full percentage point, just as it had done at its prior review in early May. The rate from now will be at 4.75%, up from 2.0% at the end of 2021, and a pandemic low of 0.75% from May 2020 until May 2021.

The MPC considers it likely that the monetary stance will have to be tightened even further so as to ensure that inflation eases back to target within an acceptable time frame. Near-term monetary policy decisions will depend on developments in economic activity, inflation, and inflation expectations. Decisions taken at the corporate level, in the labor market, and in public sector finances will be a major determinant of how high interest rates must rise.

The Central Bank of Georgia‘s 7-day refinancing rate was left at 11.0%, its level since a 50-basis point increase this past March. In five moves over the preceding 12 months, the rate had been lifted by three percentage points from a pandemic low of 8.0%. The pause in tightening had been defended on the basis of appreciation in Georgia’s currency, but that hasn’t stopped overall inflation from continuing to crest. Consumer prices posted a 13.3% on-year advance in May, up from 12.8% in April and the most since February.

Among central banks, Japan’s is becoming even more of a maverick than before. Minutes from the BOJ Board meeting strongly defended persisting with the ultra-loose policy stance and promising to augment that stance in the future if inflation fails to rise as hoped.

A resurgence of risk aversion saw stock markets plunge today in Asia but 2.6% in Hong Kong, 2.7% in South Korea, 2.4% in Taiwan, 1.4% in India, 1.2% in China, 0.9% in Indonesia, 0.8% in Singapore but just 0.4% in Japan. The German, French, Italian, British, and Spanish stock markets have posted drops between 1% and 2% so far, and so have the three main U.S. stock indices in futures trading.

This renewed flight to safety depressed ten-year sovereign debt yields by 12 basis points in the U.K., 11 bps in Germany and France, 10 bps in Italy, and 7 bps in the United States, but the 10-year JGB yield remained at 0.23%.

A big mover today has been a 4.8% slump in the price of West Texas Intermediate oil. Bitcoin’s price, once touted as an oasis of stability in times of crisis, fell 2.1%, but gold ticked 0.2% higher.

The dollar overnight rose 0.4% against the loonie, 0.3% versus sterling, and 0.2% relative to the euro but slipped 0.3% against the yen. Larger dollar gains of 1.3% and 1.0% were made against the New Zealand and Australian dollars, but the dollar fell 1.0% against the ruble.

Against the backdrop of multi-decade high global inflation, Russia’s relenting military attack on neighboring Ukraine, and central banks pivoting toward monetary restraint, consumer confidence fell sharply in June and to its lowest levels since at least 2004 in Turkey, 1974 in Denmark, and at least 1973 in The Netherlands. Belgian consumer sentiment, in contrast, recovered two index points to a 4-month high but still depressed reading of -11.

Overall British CPI inflation edged 0.1 percentage point higher to a 40-year high of 9.1% in May despite a downtick in core inflation to 5.9%. Producer output inflation of 15.7% was the most in 503 months, and producer input inflation increased 1.2 percentage points to a lofty 22.1%.

South African consumer price inflation accelerated 0.6 percentage points to a 64-month high of 6.5% in May, and core CPI inflation of 4.1% was the most in 35 months.

Irish wholesale price inflation leaped 2.1 percentage points to a 77-month high of 7.3% last month compared to a 7.6% on-year drop in the prior 12-month period ending in May 2021.

Sri Lankan producer prices posted month-on-month advances of at least 15.0% for a second straight month in April, lifting the 12-month rate of increase to 52.5% from 35.3% in March.

Moroccan CPI inflation in May held steady at April’s 14-plus year high of 5.9%.

Switzerland posted a fifth consecutive quarterly current account surplus in 1Q 2022, which at CHF 19.05 billion was up from CHF 12.78 billion a year earlier.

The 30-year U.S. fixed rate mortgage last week jumped 33 basis points to 5.98%, most in 12-1/2 years and up from 3.18% in mid-June 2021.

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

 

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