Financial Markets Exhibit Astounding Sensitivity to a Single Inflation Data Point
December 13, 2022
When the wires flashed news that U.S. CPI inflation in November was lower than forecast, share prices soared while the U.S. 10-year Treasury yield and the dollar plunged. The instant reaction of the stock market was significantly reduced in pretty short time, but the sensitivity of financial markets underscored how uncertain traders feel about current circumstances. If there is one consistent message of Fed officials through the decades, it is that policy does not react to single data points. Officials base decisions on perceived trend, and it takes a accumulation of data points to get a sense of what’s happening. Market participants understandably have scant confidence in inflation projections, since they have missed the mark so widely since the onset of Covid. The de facto lodestone for economic truth becomes hard data, and officials have repeatedly stressed that future policy is not predetermined but rather dependent upon future information. A critical element of that message, however, is that officials do not react to single data points, only to trends that can be teased out from a whole sequence of observations, any one of which might suffer from measurement error. Moreover, the Fed will look at a host of different data, and the CPI index is not near the top of that list.
Compared to Monday closing levels, the dollar is down 1.8% against the yen and Australian dollar, 1.6% versus the kiwi, 0.9% vis-a-vis sterling and the euro, 1.1% vis-a-vis the Mexican peso, and 0.5% against the Canadian dollar. The weighted dollar index touched a six-month low that is roughly 10% down from its 52-week high.
The 10-year U.S. Treasury yield is 16 basis points lower than yesterday, in contrast to a 6-bp rise in its British counterpart.
Prices for oil and gold rose 2.4% and 2.0%.
SPX, DJIA and the Nasdaq are up 1.4%, 0.7%, and 2.1% and still bouncing around in search of momentum. Major European stock markets are all up 1.0% or more. The markets in Singapore and Indonesia closed up 1%, while China’s dipped 0.1% amid continuing confusion about the handling of Covid there.
The U.S. November consumer price results were actually not extensively apart from analyst expectations, which had centered on a smaller monthly rise of 0.3%. The rise instead was just 0.1%. Due to base effects, that translated to a decline in year-on-year CPI inflation to 7.1% from 7.7 in October and a peak of 9.1% last June. It was the lowest in 11 months but still above 6.8% in November 2021. Core CPI inflation of 6.0% is just 0.3 percentage points under its recent peak of 6.3%. Most of the change between October and November reflected energy. Food price inflation of 10.6% remains in double digits, and shelter costs have lately provided the main inflationary impulse. A return to the Fed’s inflationary goal of 2% by 2024 still looks like a formidable mission.
German consumer prices also were reported today. A 10.0% year-on-year increase matched the preliminary estimate but almost three percentage points higher than the U.S. figure and not far below Germany’s record high of 10.4% in the prior month. Energy and food prices rose by 38.7% and 21.1% over the past 12 months. Core CPI inflation of 5.0% was 2.5 times higher than target.
Romanian CPI inflation of 16.8% last month has more than doubled since 7.9% in November 2021 and constitutes a 236-month high.
Investor sentiment toward Germany and the euro area rose to 10-month highs in December according to the monthly ZEW indices. That’s the most optimism since the onset of the deplorable Russian military aggression of Ukraine. But perceived current economic conditions have recovered to only a 3-4-month high.
The German current account surplus was only EUR 5.9 billion in October. It’s year-to-date EUR 104 billion is just half the size recorded a year earlier.
Alternatively in Australia, the NAB indices of business confidence (an 11-month low of -4) and business conditions (a 4-month low of +20) is vast. The economy is still flying, but businesses are bracing for impact.
In South Africa, the Sacci index business confidence rebounded to a 2-month high of 110.9, well above May’s 20-month low of 103.2.
British labor market statistics were worse than expected. Jobless claims rose the most in 9 months. The jobless rate unexpectedly increased to a 4-month high, and average weekly earnings growth of 6.1% underscored that inflation is becoming more entrenched.
Swiss officials revised projected growth lower to 1.0% next year, but also foresee CPI inflation dropping from 2.9% this year to 2.2% in 2023 and 1.5% in 2024.
Industrial production in Italy sank 1.0% on month and by 1.6% (most since January) on year in October.
U.S. small business sentiment recovered to a 2-month high in November. The IBD/TIPP index of U.S. optimism rose to a better-than-forecast December reading that was its highest since September.
The Central Bank of Armenia’s refi interest rate was increased 25 basis points to 10.75%, bring the cumulative increase this year to 300 basis points following 275 basis points of increase in 2021. The rate exceeds CPI inflation, which slowed to a 7-month low of 8.8% last month but remains more than twice the central bank’s target.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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