Concern about European Economic Outlook Mounting
September 8, 2022
The record 75 basis point increase in European Central Bank interest rates failed to lift the euro, which continues to trade below dollar parity. Europe’s economy is more exposed than others to Russia’s invasion of Ukraine. Britain’s new prime minister, Liz Truss, has imposed an emergency freeze on gas and electricity rates.
The weighted dollar is little changed today. The dollar is up 0.4% against the Australian and New Zealand dollars, 0.3% relative to the Mexican peso, 0.2% versus the euro, and 0.1% against sterling but has also fallen 0.5% against the Swiss franc and shows no net overnight movement versus the yen or loonie.
A rally today in Asian equity markets was followed by extended losses in European and North American trading. Share prices climbed 2.3% in Japan, 1.8% in Australia 1.1% in India, and 1% in Taiwan. Key U.S. indices are about 0.5% lower, and the Paris Cac, German Dax and British Ftse have dropped 1.1%, 1.7% and 0.8%.
Ten-year sovereign debt yields are up 8 basis points in the U.K., 7 bps in Germany, and 6 bps in France and Spain. But the 10-year JGB yield is unchanged despite a significant upward revision in 2Q Japanese GDP growth, and the 10-year U.S. Treasury yields has slipped two basis points.
The price of West Texas Intermediate oil increased 1.5%. Gold and Bitcoin are little changed.
An initial 50-basis point interest rate hike at the European Central Bank in July has been followed by a 75-bp hike at this month’s scheduled meeting. The three interest rates now included a 1.25% refinancing rate flanked by a 0.75% deposit rate and a 1.50% marginal lending facility rate. Prior to July, there had not been a change in rates since a 10-basis point reduction of the deposit rate to -0.50% in September 2019. In enacting their largest rate hike ever, the ECB Governing Council revised projected inflation upward and projected growth downward. CPI inflation is expected to average 8.1% this year, 5.5% next year and 2.3% in 2024, and the GDP growth forecast for 2023 was more than halved to just 0.9%. Consumer price inflation over the past year accelerated from 3.0% in August 2021 to 9.1% last month. More interest rate hikes will follow at upcoming meetings, and today’s increases today were made
because inflation remains far too high and is likely to stay above our target for an extended period. This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will support a timely return of inflation to our two per cent medium-term target.
In battered Ukraine where CPI inflation more than doubled to 22.2% in July from 10.2% a year earlier, officials at the National Bank of Ukraine had implemented a 1500-basis point interest rate hike in June to 25.0%. The previous change had been a 100-bp hike in January just before the war’s onset, and 300 basis points of tightening had occurred in 2021. Today’s central bank policy review left the key interest rate unchanged at 25% and predicted it is unlikely to fall before next spring.
Serbia’s central bank interest rate was increased today to 3.5% from 3.0%. The 50-basis point move matches the size of increases undertaken in each month of the second quarter, but analysts were expecting the move to be the same size as ones of 25 basis points in July and August. Serbian CPI inflation accelerated to 12.8% in July from 11.9% in June and 3.3% in July 2021.
Japanese GDP growth last quarter has been revised upward to 0.9% (3.5% at an annualized rate) from 0.5% estimated a month ago, which equated to 2.2% annualzed. Year-on-year growth was revised to 1.6% from 1.1% then.
Japan’s current account surplus collapsed inward from JPY 1.715 trillion in July 2021 to JPY 229 billion in July 2022. The current account on a seasonally adjusted basis in the latest reported month showed a deficit of JPY 629 billion. On a brighter note, the Japanese Economy Watchers index rose to a 2-month high in August.
Mexican CPI inflation of 8.7% in August was the highest in 260 months and up from 5.6% a year earlier.
CPI inflation in Hungary of 15.6% in August was three times greater than a year earlier and the most since 1998.
In South Africa, business confidence fell to a six-quarter low in 3Q 2022, while consumer sentiment improved to a 2-quarter high. South African factory output dipped 0.2% in July on top of June’s 2.0% plunge.
Indonesian consumer confidence recovered 0.8% last month.
The British Royal Institute of Chartered Surveyors housing index fell to a 19-month low in August.
New U.S. jobless insurance claims last week totaled 222k, the fewest in 14 weeks.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: European Central Bank, Japanese GDP, National Bank of Serbia, National Bank of Ukraine
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