Don’t Even Think that Monetary Tightening Is Going to Pause

November 17, 2022

Central bankers in the United States and around the world are doubling down to quell any investor notions that monetary tightening is about to pause while assessing the delayed results of restraint already in the pipeline. That was the message from recent comments by the Kansas City and San Francisco Fed Presidents and the actions of two Asian central banks that announced further interest rate hikes earlier today.

This sobering message sent U.S. stock futures down 0.7% overnight. In Asia, stock markets closed down 2.4% in India, 1.4% in South Korea, 1.2% in Hong Kong and 0.4% in Japan. Equities so far in Europe’s trading day have lost between 0.6% and  0.9% in the U.K., France, Spain and Italy but  just 0.1% in Germany.

The dollar has benefited from investor caution, climbing 1.0% against the Australian dollar, 0.9% versus the kiwi and yuan, 0.7% vis-a-vis sterling, 0.6% relative to the Turkish lira and euro, 0.5% on a weighted basis, 0.4% against the Japanese yen and 0.3% versus the Canadian dollar.

The prices for WTI oil, gold and Bitcoin have weakened 2.0%, 0.5% and 0.4%, respectively, while a 4-basis point rise in the ten-year U.S. Treasury yield has enhanced its comparative appeal.

More evidence of persistent global inflation was reported this Thursday.

  • Austria’s highest consumer price inflation since at least 1958 — a price rise of 1.1% on month and 11.0% from a year earlier — was reconfirmed.
  • CPI inflation in the euro area last month was revised down 0.1 percentage point but, at 10.6%, still constituted a record high and a six percentage point acceleration from 4.6% in October 2021. On-year price rises in energy and food amounted to 41.5% and 13.1%. Core inflation embodying all other  items rose to 5.0% versus 2.0% a year earlier.
  • The three largest economies sharing the euro (Germany, France and Italy) experienced monthly consumer price increases of more than 1.0%. So did the Netherlands.
  • Producer output and producer input prices in New Zealand posted quarter-on-quarter advances of 1.6% and 0.8% in 3Q 2022.
  • Portuguese producer price inflation receded further last month to a still highly elevated 16.2%. A 314-month peak of 26.6% had been touched last March.

Bank Indonesia’s policy interest rate underwent its fourth increase since an initial 25-basis point move in August, rising to 5.25% from 4.75%. Hikes in September and October had also been by a half percentage point. In response to the pandemic, five 25-basis point cuts in 2020 were culminated with a final reduction to 3.50% in February 2021. Indonesian CPI inflation of 5.71% as of October still exceeds the central bank’s medium-term target corridor of 2-4%. At 5.25%, Indonesia’s interest rate is its highest in 38 months.

The Filipino central bank policy rate hike of 75 basis points today was larger than Indonesia’s and the previous two increases done in August and September. Markets were prepared rhetorically for this larger action. At a 164-month high of 5.0%, the new policy rate level still undershoots CPI inflation, which has accelerated to a 14-year high of 7.7% and exceeds the central bank’s inflation target ceiling of 4%. By matching the Fed’s last rate increase, monetary officials hope to prevent further depreciation of their currency.

Japan’s customs clearance trade deficit of JPY 2.162 trillion in October exceeded analyst forecasts by about a third. This was the fifteenth deficit in a row and resulted in a January-October shortfall of 16.4 trillion yen compared to a surplus of 1.39 trillion yen a year earlier.

Australia’s jobless rate unexpectedly dipped to a 3-month low of 3.4% in October and was accompanied by a 32.2k increase in jobs, which was twice as much as forecasters were predicting. Full-time workers accounted for all of the growth in employment.

Hong Kong’s jobless rate fell to a 32-month low, averaging 3.8% in August-October.

Year-on-year growth in Chinese foreign direct investment has slowed from 25.6% in the first quarter of 2022 to 17.4% in the first half of the year, and 14.4% in January-October.

Construction output in the euro area has been squeezed by the European Central Bank’s aggressive imposition of the monetary brakes. After increasing 3.7% on quarter in 1Q 2022, construction output fell 1.4% in the second quarter and 0.8% on average in 3Q. September output was just 1.0% higher than a year earlier.

After posting on-year increases of 5.0% in the final quarter of 2021 and 3.5% in the first quarter of this year, Russian real GDP was 4% less than a year earlier in the two ensuing quarters in spite of spending on its war against Ukraine.

Today’s U.S. data release menu will include the KC and Philly Fed manufacturing surveys, housing starts, building permits, and weekly jobless insurance claims.

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

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