Elevated Price Data, Weak Consumer Confidence, and Changing Central Bank Rate Expectations
July 20, 2022
The dollar had retreated in recent sessions but has rebounded 0.3% so far today against the euro and versus the DXY weighted index. The dollar also strengthened overnight by 0.2% against the Swiss franc, Chinese yuan and Turkish lira and by 0.1% versus sterling. The yen and Aussie dollar are steady, and the greenback dropped 2.3% relative to the Russian ruble and 0.1% versus the Mexican peso.
Speculation remains quashed that the Fed might hike the federal funds rate by more than 75 basis points next week. But central bankers in Europe appear to be gravitating toward larger incremental tightenings.
Following yesterday’s strong rise in equities, ten-year sovereign debt yields have fallen today by ten basis points in the U.K., nine basis points in Italy and Spain, six bps in France and Germany and five bps in the United States.
The North American stock market rally on Tuesday extended overnight into Pac Rim markets, where the Japanese Nikkei closed up 2.7% and gains were made of 2.1% in Indonesia, 1.7% in Singapore and Australia, 1.2% in India, and 0.8% in China. But optimism fizzled in Europe, where the Spanish and Italian exchanges are currently down 1.2% and 0.9% and France, Germany, and the U.K. are showing more modest losses. U.S. stock futures are a bit lower, too.
Bitcoin’s price rose by a further 1.4%, but West Texas Intermediate oil and gold prices are down 1.6% and 0.3%.
After two light sessions from a data release standpoint, action has picked up today.
The Netherlands and Denmark reported record lows in July of consumer confidence. Belgian consumer sentiment dipped two index points to a 2-month low of -13, which is not far above the 17-month trough hit in March. Turkish consumer confidence had touched a record low in June of 63.4 and was still weak but at a 4-month high of 68.0 this month. A preliminary estimate of Euroland consumer sentiment will be released later today.
Euroland’s unadjusted current account printed in the red for a second straight month in May and, at EUR 15.8 billion, was the largest deficit in 16 months. As a percent of GDP, the current account surplus has more then halved to 1.2% over the last twelve reported months from 3.0% in the previous year through May 2021. On a seasonally adjusted basis, the joint-currency area experienced a third straight current account deficit of EUR 4.5 billion in May following shortfalls of EUR 3.9 billion in April and EUR 3.0 billion in March. Prior to Russia’s invasion, the adjusted surplus in January had been EUR 16.8 billion, and even worse times seemingly lie ahead, and the EU is asking nations to start rationing gas usage.
Another concern has been the Chinese economy, which no longer can be counted upon to play a substantial growth-generating role for other economies. Officials at the People’s Bank of China left its one- and five-year loan prime rates, which are set monthly, unchanged at 3.70% and 4.45%. To support China’s economy in the face of the drag from President Xi’s zero tolerance approach to Covid, those rates were lowered by 15 basis points and 20 basis points between December and May, but tighter monetary policies elsewhere are seemingly deterring Chinese officials from augmenting monetary relief aggressively now.
In a speech delivered by Reserve Bank of Australia Governor Phil Lowe, markets were instructed to prepare for a methodical series of additional rate hikes in light of the highest inflation rate in two decades that at 5.1% currently exceeds the 2-3% target range. The goal is to prevent rising long-termĀ inflation expectations, and mre than one percentage point of additional tightening would be needed merely to restore a neutral monetary policy stance.
Today’s data menu has featured numerous inflation indicators.
In June 2021, British CPI inflation of 2.5% was already at a 3-year high, but over the past year such exploded to 9.4% as of last month, marking the third straight on-year advance of at least 9.0% and the biggest 12-month increase since 1982. The latest energy price increase exceeded 40%, and food price inflation of 9.8% represents a 135-month high. Core CPI inflation edged down 0.1 percentage point to 5.8%.
British producer output price inflation accelerated 0.7 percentage points to a 43-year high of 16.5% in June, and producer input price inflation of 24.0% exceeded expectations and was almost two percentage points above May’s reading. A government measure of house price inflation jumped 0.9 percentage points to an 11-month high of 12.8% in May.
Canadian CPI inflation of 8.1% in June versus 3.1% a year earlier and 0.7% in June 2020 was the most in 473 months, but there were some silver linings to this news. The monthly 0.7% rise of consumer prices was only half as steep as in May, and a separate release of Canadian producer prices in June revealed a steep 1.1% monthly drop that curbed the 12-month rate of increased to a 15-month low of 14.3%. Such had crested at 17.9% in March.
German producer price inflation settled back 0.9 percentage points to a 3-month low, but the 32.7% was the fourth consecutive on-year change to surpass 30.0%.
South African CPI inflation rose from 4.9% in June 2021 to an above-target 6.5% in May and a 133-month high of 7.4% last month. Core CPI inflation of 4.4% was the most in 39 months.
Polish PPI inflation of 25.6% in June represents a 323-month high and contrasts with 7.0% in June 2021 and minus 0.8% in mid-2020. Czech PPI inflation increased from 27.9% in May to 28.5% in June, most since 1992. The month-on-month PPI increases in June were 1.6% in Poland and 1.4% in the Czech Republic.
Estonian PPI inflation last month of 33.3% was only 0.4 percentage points below May’s on-year pace, which had been the fastest since the first month of 1995. Georgian PPI inflation rose to a two-month high of 15.4% but remained below December record of 20.3%.
With the 30-year fixed mortgage rate rising above 5.8%, U.S. mortgage applications slumped by a further 6.3% last week.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: British CPI and PPI, Canadian CPI and PPI, Euroland current account, German producer prices