Emerging Evidence of A More Pressing Recessionary Risk in Europe than the United States
June 23, 2022
Preliminary June purchasing manager survey results highlight scant demand, a rise in unsold inventories, a mounting drag from elevated inflation, and weakening trends in both business and consumer confidence. The findings contrast with Fed Chairman Powell assertion yesterday that, while the U.S. situation presents a challenging one to policymakers, the risk of a near-term recession remains contained.
European ten-year sovereign debt yields plummeted so far today by 16 basis points in Germany and France, 14 bps in Spain, 12 bps in Italy and 10 basis point in the United Kingdom. The 10-year U.S. Treasury yield in futures trading has dipped just 3 basis points, by contrast, and even Japan’s usually steady yield slid a basis point.
The dollar climbed 0.6% overnight against the euro, 0.5% relative to the Swiss franc, Aussie dollar and sterling and 0.1% versus the loonie and kiwi. Alternatively, the dollar is 0.6% lower against the Japanese yen and has dropped 2.8% against the ruble and 0.1% vis-a-vis the yuan.
In equity trading today, share prices rose 1.6% in China, 1.3% in Hong Kong and New Zealand, 0.9% relative to India, but just 0.1% in Japan. The German Dax has fallen 0.4%, but the Paris Cac and British Ftse show similar-sized advances. Key U.S. stock indices in futures trading are up 0.5-1.0%.
Prices for gold and oil are down 0.6% and 0.4%. Bitcoin‘s price rallied 3.3%.
French overall French business sentiment dropped 1.5 index points to a 14-month low in June despite improvement in the manufacturing sector to a 2-month high. The services and retail sectors fell to 5- and 2-month lows, and sentiment in the labor market slumped to a 9-month low.
The Confederation of British industries monthly distributive trades survey fell four points to a reading of minus 5 in June, marking the third straight month with a sub-zero result and contrasts with a positive 39 reading last November.
Irish consumer confidence ticked somewhat higher in June but remained historically low at 57.7 compared to a reading of 81.9 last January and 86.8 last October.
The preliminary report of Euroland’s composite purchasing managers index fell 2.9 points to a 16-month low of 51.8 and was well below analyst expectations that had centered on a score of 54. The boost from a relaxation of Covid-19 constraints appeared to have dissipated. That faded thrust was magnified by persistent very high inflation. Business sentiment slid to a 20-month low. The manufacturing index was at a 22-month low, and services dropped 3.3 points to a 5-month low.
The German composite, manufacturing, and service sector PMI readings fell to 6-, 23- and 5-month lows. The labor market reading was at a year and a half low, and input price inflation was its second highest ever.
The French composite, manufacturing and service sector PMIs registered at 5-, 19- and 5-month lows. Business sentiment sank to a 19-month low, hit by elevated inflation but also disappointment over the ambiguous outcome of the presidential and parliamentary elections in France.
The British composite purchasing managers index in June was unchanged from May’s 15-month low of 53.1. While the services component was also unchanged from the prior month, such included a 25-month low in the business outlook. The manufacturing sector PMI reading dropped to a 23-month low in the U.K.
Australia’s purchasing managers survey result was also a disappointing one, with the composite reading of 52.6 at a 5-month low. An uptick in the manufacturing index to a 2-month high was outweighed by a 5-month low in the service sector component.
Japan’s purchasing managers survey appeared to benefit from the Bank of Japan’s continuing pursuit of an ultra-expansionary monetary policy and resulting weakness of the yen that has bolstered Japanese price competitiveness. Japan’s composite and services PMIs printed at 7- and 115-month highs. But manufacturing fell to a 4-month low and included the first outright shrinkage of orders (signified by a sub-50 reading) in 9 months.
Price data released this Thursday realed
- Unchanged South Korean producer price inflation of 9.7%, most since late 2008.
- A 128-month high in Singaporean CPI inflation of 5.6% in May, up from 2.4% a year earlier.
- A 2-month high in Swedish PPI inflation (24.4%), marking the third straight 20-plus percent increase and a threefold acceleration from 7.9% in May 2021.
Today has been a busy day for central bank watchers, too. Fed Chairman Powell will be reprising yesterday’s semi-annual testimony, this time before the House Financial Services Committee.
The Bank of Norway’s policy interest rate was hiked by 50 basis points to 1.25%. From a base of zero percent during the worst of the pandemic, the rate had previously undergone three 25-basis point increases last September, December, and March, and analysts were anticipating a fourth increase of that smaller size. In a released statement, central bank officials explained that
Prospects for a more prolonged period of high inflation suggest a faster rise in the policy rate than projected earlier. A faster rate rise now will reduce the risk of inflation remaining high and the need for a sharper tightening of monetary policy further out.
The Bank of Norway statement goes on to suggest that 1.25% is still too low and that another increase is likely in August and that an ultimate increase to 2.0% by 3Q 2023 may be needed.
At the Central Bank of The Philippines, a policy interest rate hike of 25 basis points to 2.5% matched expectations and followed a similar increase done after May’s policy review. In 2020, the overnight borrowing rate had been halved from 4.0% to 2.0%. Filipino CPI inflation of 5.4% as of May exceeds the 2-4% target and also constitutes a 42-month high. Moreover, there are signs of some upward creep in inflation expectations, so today’s action is meant to counter the risk of largely food price pressure from spreading to other parts of the economy. Projected inflation this year and next were revised upward to 5.0% and 4.2%.
The policy interest rate of the Central Bank of Paraguay has been increased by 50 basis points to 7.75%, its most elevated level since late 2011. Rate tightening began from a pandemic low of 0.75% in March 2021 and has proceeded methodically. Even so, the new 7.75% rate level is still well below CPI inflation, which has climbed to 11.4%.
One central bank besides the Bank of Japan that hasn’t begun to lift its key interest rate is Bank Indonesia, whose 7-day reverse repo rate was left again unchanged at 3.5%, which is a record low and the level since the sixth and final pandemic-related 25-basis point cut engineered in February 2021. Indonesian CPI inflation is also hovering near 3.5% and poised to exceed the 2-4% target range by the end of this year. A rise of required reserves earlier this month has readied investors to expect the interest rate to be lifted later, but they weren’t expecting that to happen today.
Few monetary policy stances in the world are more surreal than Turkey’s, where the 14.0% one-week repo rate is light years shy of PPI and CPI inflation of 132.2% and 73.5% as of May. After the rate was raised in March 2021 by two percentage points to 19%, the central bank governor was canned by President Erdogan, and four cuts totaling five percentage points during the final third of the year lowered the rate to its current level. While not cutting the rate additionally during the first half of this year (including today’s review) until inflation starts falling, officials likewise are not raising the rate in the face of hyperinflation. A released statement attributes inflation to external factors that would not be addressed by a rise of the interest rate, and they believe that a “disinflation process” may be about to begin as a result of such things as a resolution of the Ukraine war and their policy framework that encourages permanent and strengthened liraization.
Chinese President Xi has promised more policy support in the face of Covid’s drag and to promote achievement of the government’s macroeconomic targets. That presumably will imply actions from both fiscal policy and the People’s Bank of China.
A Mexican monetary policy meeting is also being held today, with the likeliest result now tilting closer to a rate hike of 75 basis points than 50 bps. Mexican nominal retail sales continue to grow, rising 0.4% on month and 4.6% on year during April. But that hasn’t kept up with CPI inflation, which has hovered between 7% and 8% for the past seven reported months.
The U.S. current account deficit widened about 30% on quarter to $291.4 billion in the first quarter of 2022. If sustained over the whole year, the $1.166 trillion deficit would tower above those of $846 billion in 2021 and $620 billion in 2020. As a percentage of GDP, the deficit last quarter grew to 4.8%, a ratio that historically has been associated with dollar danger and that is up from 3.6% in full-2021, 2.9% in 2020, and 2.2% in the last pre-pandemic year of 2019. Analysts had been anticipating a sharply wider deficit because of the previously reported trade balance figures, but today’s actual figure was still significantly wider than forecast.
New U.S. jobless insurance claims of 229k also exceeded expectations and lifted the four-week moving average to the highest point since the final week of January.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bangko Sentral Ng Pilipinas, Bank Indonesia, Bank of Norway, Central Bank of Turkey, Purchasing Managers Surveys, record U.S. current account