More Central Bank Rate Hikes and Dollar Rises to a Two-Week Weighted High
November 3, 2022
Big jumps in the dollar are continuing in the wake of yesterday’s sobering Federal Reserve press conference. The greenback is stronger than Wednesday closing levels by 1.5% against sterling, 1.0% versus the kiwi, 0.9% relative to the Swiss franc and Australian dollar, 0.6% vis-a-vis the euro and Canadian dollar, and 0.3% against the yen.
Since the Fed’s rate hike, central bank interest rates have been raised 75 basis points by the Bank of England and 25 basis points each by central banks in Norway and Malaysia.
Ten-year sovereign debt yields climbed overnight by 14 basis points in Italy, 12 bps in Germany, 11 bps in Spain and France, 10 bps in Great Britain, 8 bps in the United States, and 7 bps in Canada.
Japan’s market was shut for Culture Day, but equities elsewhere in the Pacific Rim closed down 3.1% in Hong Kong, 1.8% in Australia, 1.0% in Singapore, and 0.9% in Taiwan. In Europe, share prices are down 1.6% in Spain, 1.0% in Germany and Italy, 0.7% in France and 0.4% in the U.K.. U.S. stock futures are down about one percent.
The possibility of recession as a likelier bi-product of bringing down inflation depressed gold, oil and Bitcoin by 1.5%, 1.1%, and 0.3% overnight.
New U.S. jobless insurance claims remained historically low last week at 217k and averaged less than 220k over the latest 4-week period. A steep contraction of U.S. labor productivity during the first half of this year was followed by only a 0.3% uptick last quarter. The combination of weakened productivity and strongest wage growth in decades is lifting unit labor costs and pointing to a hard dragged-out fight to restore in-target inflation and avoid rising long-term inflation expectations. Unit labor costs climbed 3.6% in 2020, 2.4% in 2021, around 7% year-on-year in the first half of 2022, and 6.1% on-year last quarter.
Another U.S. economic data release today revealed three-month highs in September’s goods and services and merchandise trade deficits of $73.3 billion and $92.7 billion. The year-to-date goods and services shortfall through the first three quarters of 2022 was $745.6 billion, up from from $620 billion in January-September of 2021. Exports and imports each rose 20.2% on year.
The Bank of England’s Monetary Policy Committee voted 7-2 to lift the Bank Rate to 3.0%, its highest level in 14 years. The dissenting opinions favored smaller hikes of 50 bps by one and 25 bps by the other. This was the first time in over three decades that the Bank Rate has been raised by more than a half percentage point and it matches the size of the last three moves by the Fed. This month’s review of British monetary policy coincided with publication of the quarterly Monetary Policy Report. The statement explaining today’s action cites fiscal policy changes since August that have resulted in significant changes projected growth and inflation, as well as in the implicit future path of the Bank Rate that now suggests a cresting level of 5.25% next summer. That’s a far cry from a pandemic low of 0.10% that prevailed from March 2020 until December 2021. Officials hope that the rate will not need to go that high but concede that the “labor market remains tight and there have been continuing signs of firmer inflation in domestic prices and wages that could indicate greater persistence.” In contrast to the medium-term target of 2% that officials aim to restore within two years, CPI inflation rose in September back to August’s 485-month high of 10.1% and is likely to reach 11% this quarter. Officials project Britain in recession through late next year.
Consumer price data reported today by Turkey and Switzerland presented two ends of the spectrum. Turkish consumer prices rode somewhat more than 3.0% on month in both September and October, lifting the 12-month rate of increase to a 292-month high of 85.5% last month, up from 19.9% in October 2021. Turkish producer prices leaped 7.8% in October compared to September and by 157.7% year-on-year versus 46.8% in October 2021. Swiss CPI inflation, on the other hand, slowed 0.3 percentage points to 3.0% in October, matching the pace in October 2021. In between, Cyprus reported a CPI inflation rate of 8.8% in October, which is a 2-month high and up from 4.3% in the same month a year earlier.
Unemployment in the euro area slid to a record low of 6.6% from 6.7% in the previous three months and 7.3% in September 2021.
Several purchasing manager surveys were reported today:
- Japan’s composite PMI for October matched a 4-month high preliminary estimate of 51.7. The services PMI reading of 53.0 was also at a 4-month high.
- Chinese composite and services PMI scores last month of 48.3 and 49.4 constitute five-month lows, increasing the incentive for the government to lighten up its full-court press against Covid.
- India continues to outperform China’s economy, with two-month high readings in its composite and services purchasing manager indices of 55.5 and 55.1 for October.
- The non-oil U.A.E. PMI rose to 56.6 in October, a mere 0.1 point below August’s 3-year peak.
- But Egypt’s non-oil PMI, despite rising 0.1 point to a 9-month high, continued to print below the 50 neutral level at 47.7, signaling a contraction of activity.
- Hong Kong’s private PMI reading of 49.3 was also below the 50 threshold, as was Singapore’s PMI among manufacturers, which fell to a 28-month low of 49.7.
- Composite and service sector Irish PMI scores of 52.1 and 53.2 were at 20-month lows.
- Swedish composite and services PMIs improved to 2-month highs of 54.0 and 56.9.
- The British composite (48.2) and services PMI (48.8) were each revised above preliminary October estimates but still at there worst levels in 21 months. October was a chaotic month in Britain.
- Russia’s reward for pounding Ukraine into the ground was a pair of much lower purchasing manager survey readings last month of 45.8 composite and 43.7 in services than September levels.
- Lebanon’s private PMI rose 0.3 points above September’s 4-month low of 48.8.
- South Africa’s PMI reading recovered 0.7 index points to a 2-month high of 49.5.
U.S. factory orders in September rose 0.3%, matching expectations, but it was the third comparatively soft change in a row. That said, orders in January-September were 13% greater than a year earlier.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of England, Service-sector purchasing manager surveys, Turkish CPI and PPI, U.S. trade balance
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