Russia Getting Its Way in Ukraine… Western European Slowdown Intensifying
July 22, 2022
Although economic sanctions had been unsuccessful in many earlier instances, that was the initial NATO response to Russian President Putin’s blatant aggression against Ukraine. The pressure initially seemed to impose great pain on the Russian economy and financial markets. The Central Bank of Russia had previously doubled its key interest rate in 2021 from a record low of 4.25% to 8.50% and engineered a further 100-basis point increase just two weeks before the invasion in February. That was followed by a huge 1,050 hike at the war’s outset to 20.0% and accompanied by capital controls. A tumbling Russian ruble to as low as 143 per dollar fueled inflation additionally, but then the currency started recovering and eventually reversed all those losses and more, which enabled monetary officials to ease back on the monetary brakes. There were two 300-basis point rate cuts in April, another in May and a reduction of 150 basis points to 9.5% in June, completing the full reversal of the 1,050 jump. Analysts were expecting only a 50-basis point cut at today’s scheduled monetary policy review, but officials instead were sufficiently confident about inflation prospects and the ruble’s underpinnings to do another 150 basis points.
The new policy rate level of 8.0% in Russia is the lowest since November and was accompanied by an upbeat statement that declares that GDP has been contracting less sharply than had been expected, observes that indicators of expected Russian inflation are dropping fast and significantly, and predicts more Russian interest rate cuts during the second half of 2022. Inflation is projected to recede to 12-15% late this year, then 5-7% in 2023 and to return to 4% during 2024 by which time growth will be positive. This vindicative news on the economic front was juxtaposed with today’s release of preliminary purchasing manager surveys that show Euroland slip-sliding into recession as the third quarter kicked off. The British, Japanese and Australian PMIs fell to 17-, 4- and 6-month lows.
In financial market action this Friday,
- The weighted DXY dollar index, which had been higher earlier, fell back to show a 0.1% net dip.
- The dollar is 0.5% firmer against the euro but down 0.5% against the yen and 0.2% versus the ruble, kiwi and peso, and 0.1% relative to the yuan, Swiss franc, and New Zealand dollar.
- Bitcoin’s price revival was extended 2.3%, and gold rose 0.6%. WTI oil is down 0.6%.
- Ten-year sovereign debt yields dropped substantially: 29 basis points in Greece, 19 bps in Spain and Italy, 18 bps in France and Portugal, 16 bps in Germany, 14 bps in Switzerland, 6 bps in the United States and Great Britain, and two basis points in Japan.
- Among stocks, Japan’s Nikkei rose 0.4%. Russia’s MOEX is slightly more than 2% stronger, and other European share prices are up but only modestly. U.S. stocks haven’t moved much either.
Japanese total CPI inflation settled back 0.1 percentage point in June from May’s over-seven-year high of 2.5%. Core Japanese consumer price inflation, which includes energy, rose to an 89-month high of 2.2%, but energy and the CPI excluding both energy and perishable foods posted 12-month increases of 16.5% and 1.0%.
South Korean producer price inflation in June held steady at May’s 163-month high of 9.9%.
Icelandic consumer price inflation jumped to a 13-year high of 9.9% in July from 8.8% in June, 7.6% in May and 4.3% in July 2021. Icelandic producer prices rose 22.1% between mid-2021 and mid-2022.
Irish PPI inflation settled back to a 2-month low of 6.2% in June, still a big contrast from -3.3% in June 2021.
Malaysian CPI inflation of 3.4% last month was the highest in a year and up from 2.2% three months earlier.
British retail sales volume in June, which coincided with Queen Elizabeth’s Jubilee celebration, dipped 0.1% on month and 5.8% on year. Among the last eight reported months, a 0.1% uptick in April was the only month-on-month rise. Depressed by soaring inflation, consumer confidence in the U.K. held steady in July at June’s record low.
In Canada, by contrast, retail sales rose 2.2% on month in May and recorded the largest 12-month increase (14.1%) in five months.
Germany’s composite purchasing managers index slumped to a preliminary July reading of 48.0. That’s a 25-month low and the first-sub-50 printing since the early stage of the pandemic and significant because results below 50 signify outright contraction. The manufacturing and service sector PMI’s were at 25- and 7-month lows, and especially weak demand casts a big cloud over production prospects the rest of this year.
The French composite PMI fell 1.9 points to a 16-month low of 50.6, barely above the stagnation threshold, with a manufacturing reading of 49.6 already under that level and services losing steam fast with a 52.1 score aftere 53.9 in June and 58.3 in May.
Euroland’s composite PMI of 49.4 represents a 17-month low. Manufacturing fell to a 25-month low of 49.1, and services dropped 2.4 points to a 15-month low of 50.6. Business sentiment was at a 7-month low, but one bright spot was that cost inflation appeared to be cresting. That won’t stop the ECB from further rate increases, however.
In the U.K. the early July estimate of a 52.8 composite PMI (versus 60.9 in March) was accompanied by 25-month low in manufacturing (52.2) and a 17-month low in services (53.3). The business outlook dropped to a 26-month low.
Australia’s composite PMI of 50.6 connotes near stagnation as well. Manufacturing and service sector activity were each weaker than anticipated.
S&P Global’s U.S. preliminary purchasing manager survey results produced an even greater shock than had the European and Japanese surveys released earlier today. The overall composite PMI slumped 4.8 index points to a 26-month low of 47.5. Manufacturing with a a 2-year low reading of 52.3 after 52.7 in the prior month had proven comparatively resilient. But services collapsed 5.7 points to a 26-month low of 47.0, 11 index points below the reading last March. With services in a dive, it’s not that surprising that President Biden’s voter approval has also spiraled downward and why the January 6th congressional hearings are have so little effect on voters.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: British retail sales and consumer confidence, Central Bank of Russia, purchasing manager surveys July 2022
ShareThis
