Investors Spooked Ahead of Today’s FOMC Minutes, Not Reacting Immediately to Other Data

August 17, 2022

FOMC Minutes due at 14:00 EDT are expected to accentuate the primacy of restoring price stability even if that means a continuing rapid rise of interest rates amid a slowing economy.

The dollar, which has done well in times when the mood has turned risk averse, advanced overnight by 1.2% against the Australian dollar, 0.9% versus the New Zealand dollar, 0.7% relative to the Mexican peso, 0.6% versus the Japanese yen, 0.5% against the Canadian dollar, 0.4% relative to the Swiss franc, 0.2% vis-a-vis sterling but just 0.1% against the euro. Sterling has found support as it approaches last month’s low, and the euro was helped by the release of second-quarter GDP figures.

Ten-year sovereign debt yields jumped overnight by 20 basis points in Italy, 16 bps in the U.K., 14 bps in Spain, 13 bps in France and the Netherlands and 12 basis points in Germany. These advances outpaced an eight-basis point increase in the U.S. ten-year Treasury yield.

Just prior to today’s release of U.S. retail sales figures, the Nasdaq, SPX and DOW futures indices were posting losses of 0.8%, 0.7%, and 0.5%. European stock markets were down as well, led by a 1.1% slide in the German Dax. GDP in the euro area rose 0.6% on quarter (not annualized), but Germany had not participated in that expansion. In the Pacific Rim, stock markets had risen Wednesday by 1.2% in Japan, 0.7% in South Korea and India, 0.5% in China and 0.3% in Australia. Indonesian markets were closed for that country’s Independence Day.

It’s been a tough day for commodities and cryptocurrencies. The price of oil is quoted just above a 6-month low and around $86 per barrel and 30% weaker than its 52-week high. Gold remains under $1800 per ounce and 0.3% lower than Tuesday’s close. Bitcoin’s price has dropped 0.6%.

U.S. retail sales recorded neither a rise nor drop between June and July. That was marginally weaker than what analysts were predicting. The figure, which is not adjusted for price changes, was dampened by lower energy prices. Excluding motor vehicles and gas station purchases, retail sales posted a 0.7% advance. Overall retail sales climbed 10.3% year-on-year and recorded a 9.2% year-on-year average rise in May-July. This report will not affect Fed policy going forward.

In other central bank news today, the Central Bank of Namibia lifted its policy interest rate by 75 basis points to 5.5%. In four moves since February, 175 basis points of the 275-bp reduction engineered during 2020 has now been reversed. Namibian rate normalization has two goals in mind, first to counter a spike in inflation and second to maintain the Namibian currency’s link to the South African rand. Last month, the South African Reserve Bank’s policy rate had been lifted by 75 basis points, which was a larger increment than earlier tightening moves and also from 4.75% to 5.50%. Namibian CPI inflation had accelerated from 2.0% in July 2021 to 6.0% in June and 6.8% last month.

The Reserve Bank of New Zealand’s official cash rate was increased today by 50 basis points to a 7-year high of 3.0%. Soon after Covid broke out initially in China, the OCR was cut in March 2020 by 75 basis points to a record low of 0.25%. A sequence of rate increases began last October and now total seven moves. A statement released after the latest RBNZ Board meeting suggests that the OCR will crest eventually a bit above 4.0% and identifies a probable need to eventually tighten monetary policy beyond its neutral level.

The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment. Core consumer price inflation remains too high and labor resources remain scarce. Domestic spending has remained resilient to global and local headwinds to date.

Among price data reported today around the world,

  • Croatian consumer price inflation accelerated 0.2 percentage points to a record high of 12.3% in July, which compares with 2.8% a year earlier.
  • British CPI inflation jumped by a greater-than-forecast 0.7 percentage points to a 485-month high of 10.1% in July versus 2.0% in July 2021. Core CPI inflation of 6.2% also exceeded expectations.
  • British producer output inflation rose to a 505-month high of 17.1% last month, while core PPI-O inflation settled back to 0.3 percentage points below June’s record high of 14.9%. Producer input inflation fell to a 2-month low of 22.6%.
  • In New Zealand, producer output and producer input prices respectively posted monthly increases last quarter of 2.4% and 3.1%.
  • Australia’s quarterly wage cost index recorded its third straight quarter-on-quarter rise of 0.7% in 2Q 2022, which lifted the year-on-year advance to a 31-quarter high of 2.6%. Such had bottomed in the second half of 2020 at 1.4%.

With today’s release of Euroland GDP, a fuller picture of the global economy in 2Q 2022 is now coming into focus. By convention, U.S. growth is expressed at an annualized rate, while other countries tend to report the unannualized changes, which would need to be taken to the fourth power to be comparable to U.S. reporting. We already know that U.S. GDP dipped 0.2% expressed the European way, and that real GDP in the U.K. and Japan fell by 0.1% and rose 0.5%. Distorted greatly by Covid lockdowns, Chinese GDP plunged 2.6%.

Euroland’s GDP performance last quarter was most similar to Japan’s. GDP rose 0.6%, which was revised down from a preliminary 0.7% estimate but still greater than increases of 0.5% in the first quarter and 0.4% in the final quarter of 2021. Individual country growth rates last quarter within the European Union were led by gains of 2.6% in the Netherlands and 2.1% in Romania, followed by 1.1% in Hungary and Spain, 1.0% in Italy, 0.6% in Finland and Cyprus, 0.5% in France and Austria, and 0.2% in Belgium. German GDP flatlined, and Portugal and Poland saw their GDP fall 0.2% and 2.3%. In the whole euro area, the 0.6% rise of GDP was accompanied by a 0.3% quarterly increase in jobs. GDP and employment were 3.9% and 2.4% greater than year-earlier levels. U.S. GDP, by comparison, rose only 1.6% over the last four quarters.

Swedish and Danish GDP rose 1.4% and 0.7% between 1Q and 2Q and were 4.2% and 4.4% above their levels a year earlier.

In Japanese data releases today, investors learned that Japan’s customs basis trade balance swung from a surplus of JPY 435 billion in July 2021 to a deficit of JPY 1.437 trillion last month. Import expansion of 47.2% outpaced the 19% rise of exports. Domestic private core machinery orders in rose only 0.9% in June but climbed 8.1% in the second quarter. Machinery orders from the public sector and other countries rose 0.3% and fell 4.6% in the latest month. Moreover, private domestic, government, and export orders for machinery are all expected to drop during the third quarter.

South African retail sales fell 0.4% in June and were 2.5% less than a year earlier, their largest on-year decline in 17 months.

Norwegian consumer confidence tumbled to a 30-year low last quarter of -26.8 following readings of -15.3 in 1Q and +1.0 in 4Q 2021.

Hong Kong’s jobless rate dipped to 4.3% in the three months to July, its lowest level in a half year.

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

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