Unusual Developments
October 20, 2022
British Prime Minister Truss just announced her resignation after an unusually brief six weeks in office. Having campaigned as the second coming of Margaret Thatcher, Truss lost the the confidence of her own party when a public roar of protest greeted her program of radical and unfunded tax cuts. Her departure is unlikely to quell the very high level of political and policy uncertainty in Great Britain. Financial market reaction has been muted.
- The ten-year British gilt yield had been down four basis points prior to the announcement but is now unchanged on the day. The British Ftse is likewise flat, and sterling, which had recovered 0.6% against the dollar, hasn’t moved further.
It’s been a down session for the dollar generally, with losses of 0.4% against the euro, loonie, and kiwi and of 0.5% against the Australian dollar. Prices for WTI oil, gold and Bitcoin have risen 2.1%, 0.3% and 0.1%.
At one point overnight, the yen got as weak as 150.1 per dollar, crossing to the weak side of 150 for the first time since the summer of 1990. That was in a period of restrictive Japanese monetary policy. Even now, the Nikkei-225 index remains 30% below its all-time peak reached at the end of 1989. For pundits who maintain that equity markets always rise in the long term, Japan’s experience serves as a notable exception.
Stock markets in the Pacific Rim closed down 1.0% in Australia, 0.9% in Japan and South Korea, 0.8% in New Zealand, 1.4% in Hong Kong, and 0.5% in China. In Continental Europe, share prices are up 0.3% in France and down 0.2% in Germany, and U.S. stock futures just before the 09:30 open were very narrowly mixed.
A bizarre tinge to this Thursday had been injected earlier by the Central Bank of Turkey whose officials slashed its one-week repo rate by 150 basis points to 10.5%. Seven reductions beginning in September 2021 add up to 850 basis points from a then-peak of 19.0%. Turkey’s easing monetary policy cuts against the global grain, and yet CPI inflation in Turkey had accelerated from 11.9% in September 2020 to 19.6% one year later when the central bank’s easing cycle started and subsequently soared to 83.5% by September 2022. A statement released by the Monetary Policy committee also pre-announced an additional and final one and a half percentage point rate cut to be likely taken at the next scheduled policy review and summarizes its coming policy framework:
It is critically important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as further escalation of geopolitical risks. Accordingly, the Committee has decided to reduce the policy rate by 150 basis points. The Committee evaluated taking a similar step in the following meeting and ending the rate cut cycle. To create an institutional basis for sustainable price stability, the comprehensive review of the policy framework continues with the aim of encouraging permanent and strengthened liraization in all policy tools of the CBRT.
In other central bank developments,
The National Bank of Ukraine left its key policy interest rate unchanged at a lofty 25%. It’s been at that level since a 15 percentage point hike in June, a 1 percentage point rise in January and 300 basis points of increase in the final ten months of 2021 from a record low pandemic level of 6.0%. CPI inflation in Ukraine of 24.6% last month was at a 7-1/2 year high and almost level with the central bank’s interest rate. A released statement projects inflation cresting at around 30% within a few months and indicates that a scope for cutting the interest rate below 25% is unlikely to emerge before the spring of 2024. And “if required, the NBU stands ready to raise the key policy rate above its forecast and will further deploy additional measures to protect international reserves, as well as and to maintain control over inflation.”
Bank Indonesia’s seven-day reverse repo rate was lifted by an expected 50 basis points to a 32-month high of 4.75%. There had been two earlier hikes this year of 25 basis points in August and 50 bps in September. At 4.75%, the rate is just 25 basis points below its pre-pandemic level of 5.0%. Indonesian inflation hovered just marginally under 6.0% in September, double the mid-point of the official target range of 2-4%.
Saint Louis Federal Reserve District President Bullard urged his colleagues to tighten beyond previous indications if U.S. inflation fails to decline along lines that they have been assuming.
Last but not least, the People’s Bank of China did not cut its one-year and 5-year loan facility rates of 3.65% and 4.30% further at this time. The rates were last reduced in August and since December 2021 have been lowered by 20 and 35 basis points, respectively. Meanwhile, the mystery of why a scheduled slew of Chinese economic data releases this week have not been reported continues. In the absence of official explanation for the delay, markets are assuming the worst, namely that Chinese economic growth has slowed considerably faster than presumed and that whatever data eventually do get reported are not to be believed. The hesitation of central bank officials to cut interest rates again may reflect weakness in the yuan that they don’t wish to encourage.
German producer price inflation in September matched Augusts’s record high of 45.8%, which compares with 14.2% in September 2021. The energy component has a price increase of 132% versus a year ago.
Polish producer price inflation of 24.6% last month was the least in five months but still well above 10.3% in September 2021.
Euroland’s current account continues to deteriorate dramatically. The seasonally adjusted deficit in August of EUR 26.32 billion was almost a third larger than forecast, and the unadjusted balance swung from EUR 342 billion surplus in the 12-months through August 2021 (equivalent to 2.8% of GDP) to a deficit of EUR 9.4 billion in the ensuing 12-month period (equivalent to -0.1% of GDP).
Norwegian business confidence slumped to a nine-quarter low in the third quarter of 2022.
Dutch consumer confidence in October matched September’s record low of -59 compared to a reading of -10 a year earlier.
Irish consumer confidence of 46.1 bounced above September’s 167-month low of 42.1 but was down from 86.8 in October 2021.
French business confidence this month edged 0.1 point above September’s 17-month low reading of 101.8.
Japan’s customs clearance trade balance posted a 14th consecutive deficit in September and, at JPY 2.094 trillion, was three and a third times wider than a year earlier. The seasonally adjusted deficit of JPY 2.01 trillion exceeded two trillion yen for a third straight month.
The Australian monthly labor statistics were mixed. The unemployment rate has been at a record low 3.5% in three of the last four reported months versus 4.6% in September 2021. But the number of employed workers rose only 0.9k in September, which was less than analysts were forecasting.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank Indonesia, Central Bank of Turkey, French business confidence, Japanese trade balance, National Bank of Ukraine, Truss resignation
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