Central Bank Interest Rate Hikes and U.S. Data Clobber Share and Bond Prices, But Dollar Soars

December 15, 2022

No fewer than eight central banks have hiked interest rates today: the European Central Bank, Bank of England, Swiss National Bank, Bangko Sentral ng Pilipinas, and Hong Kong and  Macau Monetary Authorities all by 50 basis points and matching the Fed’s action yesterday; the Bank of Norway by 25 basis points; and the Central Bank of the Republic of China (Taiwan) by 12.5 basis points. Inflation has been widely  depicted as far too high and likely remain so for longer than envisaged previously, and a return to price stability is to be the top priority even at the risk of recession.

Disappointing U.S. economic data were also reported this Thursday. Retail sales slumped 0.6% in November, the  biggest monthly drop in 11 months, and registered the smallest year-on-year increase (6.5%) in 23 months. Industrial production fell 0.2% in November after dropps of 0.1% in August and  October that sandwiched a mere 0.1% uptick in September. A 2.5% rise of output compared to the same month a year earlier was the smallest 12-month increase in 20 months. Capacity utilization dropped to a 5-month low. The Empire State manufacturing index tumbled from a reading of +4.5 in November to -11.2 in December, and the Philly Fed manufacturing index printed more deeply in the red than predicted at -13.8. Even an 11-week low 211k of  new jobless claims was not greeted well by financial markets because it reinforces the Fed’s special concern that the labor market is much too tight.

In overnight trading, the dollar as a refuge currency shot up 1.9% against the yen, 2.3% versus the Aussie dollar, 1.7% relative to sterling, 1.5% vis-a-vis the New Zealand dollar, 0.8% against the  Mexican peso, 0.6% versus the Canadian dollar and Swiss franc, 0.4% against the euro and 0.3% relative to the Chinese yuan.

Prices for Bitcoin, WTI oil and gold are respectively down 2.3%, 1.3%, and 1.7% so far today.

Ten-year sovereign debt yields have jumped by 29 basis points in Italy, 19 bps in Spain, 16 bps in France, 14 bps in Germany but dipped by six bps in the U.K. and 2 bps in the  United States.

The Nasdaq is trading almost 3% lower, and the S&P 500 and DJIA each have dropped over 2.0%. The German Dax and Paris Cac of 3% lower, while stock markets in Hong Kong and South Korea closed 1.6% down. The Japanese, Chinese and Aussie equity markets lost 0.4%, 0.3% and 0.6%.

Japanese posted a 16th straight trade deficit in November, which at JPY 2.027 trillion was similar in size to October’s shortfall. The tertiary index of Japanese service sector activity edged up only 0.2% in October, reversing September’s 0.2% drop and posting just a 1.6% year-on-year increase.

Australia’s labor market was hotter than forecast in November, with a 64k increase in jobs, just 3.4% unemployment, higher labor participation.

New Zealand GDP grew 2.0% on quarter and 6.4% on year in 3Q 2022.

Among released Chinese November economic statistics today, a 2.2% on-year  increase of industrial production was lower than expected and the weakest in a half year. Retail sales tumbled 5.9%, also constituting the worst result since May. Fixed asset investment, which began 2022 with a 12.2% on-year advance in January-February, pared that gain to 5.3% for the 11-month January-November period. China’s 5.7% jobless rate in November was the most since May, and property prices recorded a seventh straight year-on-year drop, falling 1.6% compared to November 2021.

German wholesale prices fell 0.9% on month in November, recording the smallest 12-month rate of increase (14.9%) in 14 months, but that mainly reflected the volatile mineral products component.

French consumer price inflation in November of 6.2% matched October’s 448-month high.

Producer prices in South Africa rose 0.5% on month in November, which was associated with a 15% on-year advance versus a record 18% in  July.

French business confidence improved to a 4-month high in December, but the 102.5 reading was down from 113.3 in November 2021.

Interest rate policies in Hong Kong and Macao are subordinated to maintaining exchange rate pegs, so when the Fed hikes interest rates, so do  the monetary authorities in those places. Their new rates will now be 4.75% each.

Taiwan’s central bank, which reviews monetary policy on just a quarterly basis, implemented a 12.5-basis point hike  at each review this year. The rate level now becomes 1.75%, which is its highest point in seven years. Officials do not rule out further rate hikes “in a timely manner as warranted, so as to fulfill the statutory duties of maintaining financial and price stability, and fostering economic development within the scope of the above objectives.”

The Central Bank of The Philippines halved its policy interest rate in 2020 to 2.0% and held such at 2% from November that year until May 2022. Seven subsequent rate increases this year have lifted such to 5.5%, highest since early 2009. Of the five increases since mid-2022, two were by 75 basis points and three were 50 basis points in size, including today’s decision. Filipino CPI inflation of 8.0% now is the highest since 2008. A released statement asserts that “The BSP remains steadfast in its commitment to its primary mandate of sustaining price and financial stability and stands ready to take all necessary action to bring inflation to within the 2-4 percent government target band over the medium term.”

A 25-basis point hike of the Bank of Norway‘s policy interest rate to 2.75% matches November’s incremental tightening and brings the rate level to its highest level since February 2009. Rate normalization began in September 2021 from a level of zero percent. More increases are highly probable, as inflation has been higher than imagined earlier and is now expected to remain elevated for a longer duration. “The forecasts for the Norwegian economy are more uncertain than normal, but if the economy evolves as anticipated, the policy rate will be around 3 percent next year”, says Governor Ida Wolden Bache.”

At the Swiss National Bank, monetary policy is reviews quarterly. The policy interest rate had been at -0.75% from January 2015 to June 2022. Today’s 50-basis point rate hike lifts the level to 1.0%. More hikes will be needed, and officials also reaffirmed their foreign exchange policy which allows for discretionary intervention to counter excessive strength in the Swiss franc. They expect inflation to dip only temporarily below the 2% target and to climb back above such by the third quarter of 2025. A released statement updates projected inflation to show a higher path than indicated at the September review from next summer onward.

The Bank of England‘s Monetary Policy Committee’s 50-basis point rate hike to 3.5% matched expectations but did so in an unusual way. In a 6-3 vote, there was on dissent from Mann that preferred to raise the policy rate by 75 basis points as the committee had done in November but also two dissents from Tenreyro amd Djomgra that voted against any increase. The baseline forecast believes that  inflation peaked at 11.1% in October and that recession has already begun. Wage pressure is elevated, and inflation risks are skewed to the upside.  Rate normalization from a pandemic low of 0.1% began  in December 2021.

The European Central Bank statement explaining today’s 50-basis point rate hike reads hawkishly. A lot more increases lie ahead, although the assertion is made that any recession is likely to be relatively short and shallow. At 2.5%, the refinancing rate remains well below inflation, and projected inflation for 2023 has been revised upward to average 6.3% (4.2% core) from 5.5% in last September’s previous forecast update. Projected inflation in 2023 is just 0.5%, less than thought earlier because of likely contractions this quarter and next. Economic growth stays below 2% in 2023 and 2024. Balance sheet reduction will commence in March 2023. “the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.” Consumer prices in November were 10% above a year earlier. the target is 2.0%, and projected inflation even in 2025 averages over that threshold at 2.3%.

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

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