Slackening Demand and Confidence But Persistently Red-Hot Inflation as Several Central Banks Unveil Latest Policy Decisions
July 21, 2022
The dollar was already lower when the European Central Bank announced a more aggressive rate hike than implied in previous forward guidance. That move pushed the dollar down further such that it currently shows net overnight drops of 0.9% against the euro and 0.6% against the DXY weighted index. By comparison, the dollar is little changed against sterling, yen, peso, and yuan.
Stock markets on Thursday closed down 1.5% in Hong Kong and 1.0% in China but higher in Taiwan, Australia, Japan and South Korea. European equity markets have shown a resilient reaction to the ECB’s announcement and seemingly welcome that officials are getting serious about inflation. Nasdaq and S&P 500 futures are slightly in the black.
Bitcoin‘s value (+1.7%) continued to rebound from massive earlier losses. WTI oil tumbled 4%, and gold, which had fallen to a 14-month low, is little change and just barely holding on to the $1700 level.
In spite of the ECB’s Transition Protection Instrument intended to forestall fragmentation among its member long-term interest rates as the central bank tightens short-term rates, the 10-year Italian sovereign debt yield’s 22-basis point jump exceeds the response of similar assets of other members. That’s twice the rise of the German bund yield.
The European Central Bank’s three key interest rates were raised by 50 basis points, not the 25 bps that it was expecting to go when the previous policy meeting was held in early June. The new rate configuration is a 0.50% refinancing rate, flanked by a zero percent deposit rate and a 0.75% marginal lending rate. Today’s interest rate increases are the first hike in 11 years, but officials did not take the additional step of ending their policy of reinvesting the principal of maturing securities that it acquired during previous quantitative tightening. Inflation has climbed to a record 8.6% and is still cresting. According to the rate announcement,
Further normalization of interest rates will be appropriate. The front-loading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions. The Governing Council’s future policy rate path will continue to be data-dependent and will help to deliver on its 2% inflation target over the medium term.
At the other end of the central banking spectrum, the Bank of Japan as expected made no concession to globally generated inflation, this year’s depreciation of the yen, and the trend of other central banks that have been tightening monetary policies. At its latest meeting, the BOJ Board kept its short-term interest rate at -0.1%, which has been the level since March 2013, or the 10-year JGB yield target of “around zero percent,” since a Quantitative and Qualitative Expansion with Yield Curve Control framework was adopted in September 2019. As has been the case for a long time, the vote in favor of the status quo was 8-1 with Board member Kataoka again dissenting in favor of even greater stimulus. The Bank of Japan’s quarterly Outlook for Economic Activity and Prices report was released after the meeting ended. GDP growth in Fiscal 2022 was revised downward by a half percentage point to 2.4%, while forecasts for the ensuing fiscal years were bumped marginally higher to 2.0% and 1.3%. Projected core inflation was raised to 2.3% in Fiscal 2022, 1.4% in fiscal 2023 and 1.3% in the outyear of FY 2024. Not only did officials reject any notion of raising its interest rates, they retained the pledge to intensify stimulus if inflation fails to track as they assume, and it becomes apparent that the inflation goal cannot be reached.
Bank Indonesia officials also reviewed policy and, as expected, left the 7-day reverse repo rate at a record low of 3.5%. It’s been there since a 25-basis point rate cut in February 2021 capped 125 basis points of easing during 2020. CPI inflation in Indonesia is currently above the 2-4% target range at 4.55%, which is a 5-year high, but officials maintain that core inflation is manageable.
At the Central Bank of Turkey, the one-week repo rate was left at 14.0%. There have been no changes during 2022 so far, a stark contrast to 2021 that saw the rate get hiked by 200 basis points to 19% in March but then cut in each of the year’s final four months by a total of 500 basis points. Turkey has a 5% inflation target but actual inflation of 79% as of June, most since 1998. Turkey also has an autocrat for president, who speaks publicly and often about the need for lower interest rates and who had the former central bank governor removed after the March 2021 rate hike. For the record, Turkey’s central bank blames elevated inflation on everything but its own macroeconomic policies and continues to promote the objective of liraization in Turkey’s economy. Today’s statement concedes that the risk of a recession has become a lot likelier.
Officials at the Central Bank of Uzbekistan followed up on a 100-basis point policy interest rate cut in June with a similar-sized reduction at this month’s review. Along with a full percentage point cut in September 2020, these three moves reverse a 300-basis point rate hike done last March in early reaction to the Russian invasion of Ukraine. The country has double-digit 12.2% CPI inflation but also a high target of 12-14%, and officials are worried about global drags on economic growth.
New U.S. jobless insurance claims rose further last week to 251k, their highest level since the week of November 27, 2021. The four-week average of 240.5k compares to a low-point of 170.5k three and a half months ago. A separate U.S. indicator released today, the Philly Fed monthly manufacturing index, dropped nine index points to a 26-month low of -12.3, having crested at +39 last November. Monetary tightening in the United States as elsewhere has impacted demand adversely, but it will take time for that process to filter down and reduce inflation. The delay could be longer, if external price pressures like the war in Ukraine and an overheating planet keep interfering with the supply side.
Among data released today from other countries, that theme also is underscored.
Japan’s customs clearance trade balance swung to a deficit of JPY 7.92 trillion in the first half of 2022 from a surplus of JPY 848 trillion in the first half of 2021. Imports of mineral fuels soared 106% on year in the half and by 137% in June alone because of the jump in prices.
Norwegian business confidence fell five index points to a 7-quarter low of 3.2 in the second quarter, having crested a year earlier at +11.0.
Overall French business confidence and sentiment in manufacturing weakened to 15-month lows in July. Confidence in construction, retail and the services sector was also weaker in July than June. The composite index for all sectors printed at 102.9, down from 104.0 in June and 112.4 last February.
Latvian PPI inflation retreated slightly to 30.1% in June from a record high of 32.3% in May. Although low by international standards, Hong Kong’s 1.8% CPI inflation rate in June was 50% greater than May’s on-year pace and Hong Kong’s highest pace in six months.
One final fact to keep in mind: surveys repeatedly show that consumer confidence is more sensitive to rising inflation than rising unemployment. Politicians ignore inflation at their own peril.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank Indonesia, Central Bank of Turkey, Central Bank of Uzbekistan, ECB and BOJ policy, Japan trade balance
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