Marking Time Ahead of Friday’s U.S. Employment Situation Report… Bank of England Projects Recession

August 4, 2022

The dollar edged 0.1% lower against the euro, Swiss franc, and on a weighted DXY basis. The dollar also fell 0.5% versus the New Zealand dollar and 0.3% relative to the Australian dollar. There was no net dollar movement overnight versus the Japanese yen, Chinese yuan or Canadian dollar. The weakest major currency has been sterling. In raising its interest rate by half a percentage point to 1.75%, officials at the Bank of England projected a recession lasting somewhat more than a year and beginning in the final quarter of 2022. It’s very rare for any officials anywhere to predict an economic contraction before one starts.

Share prices in Europe show decent gains so far today. The German Dax, up 1.2%, has one of the larger advances. In the Pacific Rim, stock markets rose 2.1% in Hong Kong, 0.9% in Singapore, 0.8% in China, 0.7% in Japan, but fell 0.5% in Taiwan in the wake of U.S. House Speaker Pelosi’s controversial visit. Opinions on the appropriateness and fallout of her gesture continue to range widely. U.S. stocks are essentially flat as investors await tomorrow’s monthly labor market data.

Ten-year sovereign debt yields have dropped sharply in Europe (8 basis points in the U.K., 7 bps in France, 6 bps in the Netherlands and Spain, and 5 bps in Germany and Italy). The ten-year U.S. Treasury and British gilt yields are a basis point lower.

Prices for WTI oil, gold and Bitcoin have firmed 0.6%, 0.3% and 0.1%.

Brazil’s Selic interest rate was lifted 50 basis points as expected to 13.75% (see review). From August 2020 until March 2021, the rate had been just 2.0%.

The Bank of England’s 50-basis point interest rate hike to 1.75% also matched expectations, but the decision was not a unanimous one. Committee member Tenreyro preferred an increase of 25 basis points, the size of the previous four increases done in February, March, May and June. The Bank of England’s initial rate hike last December had been a move of 15 basis points from the pandemic low of 0.10%, and it was the first increase by a major industrialized economy in the current cycle of rate normalization. A statement explaining today’s sixth rate hike projects that CPI inflation is now up to 9.4% and expected to crest in October around 13.2% but then “to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead… Underlying nominal wage growth is expected to be higher than in the May Report over the first half of the forecast period.” Regrettably as a result of the very elevated inflation and the need to counter such, “The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.” This sobering warning concedes that unusually high uncertainty surrounds the baseline scenario but implies that the Bank Rate will rise by a further 125 basis points over the coming twelve months. The statement also announces that net gilt sales to reduce the central bank’s balance sheet will start next month.

In other central banking news today, St. Louis Fed President Bullard personally prefers another 150 basis points increase in the federal funds target over the balance of 2022. And officials at the Czech National Bank, where the two-week repo rate had previously risen from a pandemic low of 0.25% (maintained from May 2020 until June 2021) to 3.75% by the end of 2021 and 7.0% by May 2022, was left at 7.0% after this week’s policy review. An unchanged policy rate had been the prevailing expectation of analysts.

U.S. new jobless insurance claims rose further in line with expectations to 260k last week, most 8-1/2 months and up from a cyclical low of 166k in the week of March 19. Separately, the U.S. goods and services trade deficit for June printed at $79.0 billion, about $500 million shy of market expectations but still more than 11% wider than the June 2021 deficit. The first half deficit of $535 billion was 33.4% larger than a year earlier.

Data release highlights from other countries today include

  • Drops in June of 0.4% on month and 9.0% on year in German factory orders. That was the fifth straight month-on-month decline and the biggest 12-month rate of drop in 27 months.
  • Euroland’s construction purchasing managers index (48.7) revealed declining activity for a third straight month and the fastest pace of deterioration in 17 months. Germany, France, and Italy each had sub-50 readings.
  • The British construction PMI fell to a 26-month low of 48.9 in July and broke a string of readings above the 50 breakeven threshold that included back-to-back scores of 59.1 in February and March.
  • Ireland’s service-sector purchasing managers index bounced above June’s 6-month low of 55.6 to a 2-month high of 56.3 in July.
  • Consumer confidence in Mexico weakened to a very depressed and 16-month low reading of 41.3.
  • Dutch CPI inflation rose 0.7 percentage points to a 562-month high of 10.3% in July. Core inflation of 4.9% was the most ever and up from 0.6% a year earlier.
  • ¬†Cypriot CPI inflation of 10.9% last month was at a 491-month high and over twice the 4.0% on-year pace in July 2021.
  • Australia’s trade surplus in the first half of 2022 of A$ 74.2 billion was 31.8% wider than a year earlier and included a record monthly surplus of A$ 17.67 billion in June.
  • Canada’s C$ 5.046 billion trade surplus in June was its widest since August 2008 and helped lift the quarterly surplus to 11.8 billion Canadian dollars from C$ 8.2 billion in the first quarter.

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


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