A Busy Wednesday as Central Banks Compete with Data for Market Attention

September 7, 2022

Dollar strength continues, with another 20-year high touched overnight by the weighted DXY index. At 144.98, the dollar climbed 1.4% overnight and to its highest Japanese yen value since August 1998 when the Asian debt crisis was raging. The greenback also has advanced 0.8% versus sterling and 0.3% vis-a-vis the Canadian, Australian and New Zealand dollars.

Equity markets lost 1.4% today in South Korea and Australia, 1.8% in Taiwan, 0.8% in Hong Kong, and 0.7% in Japan. The British Ftse is o.8% lower, but U.S. markets show modest gains thus far.

After sharp advances earlier this week, ten-year sovereign debt yields have dropped back 7, 6, and 5 basis points in the U.K., Germany and United States.

The price of WTI oil is under $84 per barrel and down 4.3% so far this day. Bitcoin is little changed but trading below $19,000. Gold edged 0.1% higher.

The Bank of Canada Board engineered an as-expected 75-basis point rate hike to 3.25%. This was the fifth increase since March from a pandemic base of 0.25%. The rate level is at a 14-year high, and more increases and continuing quantitative restraint lie ahead. According to a statement, “The effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices… The Canadian economy continues to operate in excess demand, and labor markets remain tight… The Governing Council still judges that the policy interest rate will need to rise further. Quantitative tightening is complementing increases in the policy rate. As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target. Year-on-year CPI inflation of 8.1% in June constituted a 39-year high. While inflation decelerated a bit in July, core inflation continued to move higher.”

Officials at the National Bank of Poland engineered their eleventh interest rate hike since August 2021, lifting such from 0.25% to 6.75% after today’s 25-basis point increment. The Russian invasion of Ukraine has been particularly disruptive and unsettling to this neighboring economy. CPI inflation, which has been aggravated by zloty depreciation, has tripled from 5.5% in August 2021 to 16.1% last month. “NBP will take all necessary actions in order to ensure macroeconomic and financial stability, including above all to reduce the risk of inflation remaining elevated. NBP may intervene in the foreign exchange market.”

The Central Bank of Chile‘s monetary policy has underwent a radical shift since mid-2021. Starting at just 0.50%, the policy interest rate was raised to 4.0% during the second half of last year and — after yesterday’s announced greater-than-expected full percentage point increase to 10.75% — a further 675 basis points so far this year. There were two dissenting votes in the latest decision, one favoring an  increase of 75 basis points but the other pushing for a move of 125 basis points. “Headline inflation has continued on an upward path and stood at 13.1% annually in July, while core inflation —measured by the CPI without volatiles— rose to 10% annually. The July CPI data surprised to the upside, mainly driven by greater increases in volatile prices. Survey inflation expectations (EES and FTS)— have been adjusted upwards.With this decision, the MPR is at the maximum level considered in the central scenario of the September Monetary Policy Report. Future movements of the policy rate will depend on the evolution of the macroeconomic scenario and its implications for the convergence of inflation to the target. The Board will be especially vigilant of the upward risks for inflation, not only because of the high level it has reached but because inflation expectations two years ahead remain above 3%.”

Trade data were reported today for China, Canada and the United States:

  • China’s surplus narrowed to a 3-month low of $79.39 billion in August, but the year-to-date surplus of $560 billion was 51% higher than a year earlier.
  • Canada’s surplus of C$ 4.05 billion in July was also at a 3-month low but well above the July 2021 surplus of less than C$ 100 million.
  • The U.S. deficit contracted sharply to $70.65 billion in July from $80.88 billion in June, but the year-to-date deficit of $607 billion far exceeded the January-July 2021 deficit of $470 billion.

GDP growth in Euroland last quarter was revised up 0.2 percentage points to 0.8% on quarter and 4.1% on year. Employment grew 0.4% on quarter and 2.7% on year. Personal consumption accounted for three fourths of the rise in GDP.

Chinese international reserves dropped $49 billion last month and to a 46-month low of $3.055 trillion. Japanese reserves fell $31 billion to $1.292 trillion.

German industrial production slipped 0.3% on month and fell 1.1% on year in July. In that same month, Italian retail sales went up 1.3% on month and 4.2% on year.

Australian GDP grew 0.9% last quarter and was 3.6% higher than in 2Q 2021.

South Korea’s current account surplus collapsed to $1.09 billion in July, reflecting the first trade deficit in almost a decade.

Britain’s Halifax house price index showed a 3-month low 11.5% year-on-year increase.

U.S. mortgage applications fell in each of the past four weeks as the 30-year fixed mortgage rate climbed sharply.

Japan’s index of coincident economic indicators posted its highest reading since September 2019 in July, but the index of leading economic indicators dropped to a 17-month low.

Estonian CPI inflation accelerated to a 313-month high of 24.8% in August from 5.0% a year earlier. Austrian wholesale price inflation slowed to a six-month low in August but still exceeded 20% at 21.3%.

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

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