Fresh Reality Check Drives Stocks, Bonds and Crypto Lower but Dollar Up
December 22, 2022
The dollar strengthened 0.8% against the New Zealand currency, 0.6% relative to sterling, 0.5% versus the Australian and Canadian dollars, and 0.4% vis-a-vis the Swiss franc but just 0.1% against the euro and not at all versus the Japanese yen or Chinese yuan so far today.
Equities had done mighty fine in the Pacific Rim, closing up 2.7% in Hong Kong, 2.5% in China, 1.5% in Taiwan, 1.2% in South Korea, and 0.5% in Japan and Australia. But a sharp upward revision to U.S. GDP growth last quarter abruptly shifted the mood. At the moment, the Nasdaq, S&P500, and DOW show losses of 2.6%, 1.9% and 1.4, and stock markets in Germany, France and Italy are down 1.0% to 1.3%.
Ten-year sovereign debt yields have climbed four basis points in Germany, Spain and the Netherlands, 3 basis points in Italy, and 5 bps in France but dropped 8 bps in Japan and one basis point on net in the United States.
Prices for gold, WTI oil and Bitcoin have dropped 1.2%, 0.2%, and 0.8%.
U.S. quarterly GDP growth at an annualized rate in 3Q has been revised upward by 0.6 percentage points to 3.2%. That’s an unusually large change for the third and final estimate and reflects broad array of upward adjustments affecting personal consumption, business non-residential investment, government spending, and exports. On-year real GDP growth is still estimated at 1.9%, and the latest estimates for inflation measured by the total and core personal expenditure deflators are 6.3% and 4.9%, respectively.
Meanwhile, new weekly jobless insurance claims (216k) rose less than forecast, highlighting the continuing tightness of the U.S. labor market along with the faster-than-presumed growth in aggregate demand put Federal Reserve policymakers in a difficult spot if they want to retain credibility in their pledge to do whatever it takes to restore price stability. The more aggressive the Fed becomes, the better the dollar is likely to perform, and a drawn-out process of elevated interest rates and above-target inflation is not a good recipe for corporate profits or equity values. Crypto has been scandalized and additionally exposed as a poor store of value in inflationary times.
Swedish producer prices jumped 2.0% on month and rebounded from a one-year low of 18.7% in on-year terms in October to 19.5% in November.
Italian producer prices, which dropped 3.5% in October, bounced 2.6% higher in November to an 11-month high of 29.4% in year-on-year terms.
Icelandic PPI inflation slowed to a 28-month low of only 3.5% in November, but the more influential consumer price inflation clocked in at a 4-month high of 9.6% in December.
South Korean PPI inflation decelerated a percentage point further to 6.3% in November, having crested last June at 10.0%.
Average weekly earnings growth in Canada reaccelerated 0.3 percentage points to 3.4% in October.
Britain is now experiencing the weakest growth among Group of Seven economies, and officials there are warning of a recession apt to stretch into 2024. The quarterly GDP contraction in 3Q was revised downward to -0.3%, and it followed a mere 0.1% uptick in 2Q. Consumer and business spending both contracted in the latest period, and year-on-year growth halved to 1.9%. One bright sign was a rise in exports juxtaposed against a drop in imports.
A separate British data release revealed that the current account deficit shrank further to GBP 19.4 billion (3.1% of GDP) from GBP 33.8 billion in 2Q (5.5% of GDP) and GBP 43.9 billion in the first quarter (equal to 7.2% of GDP). As a share of GDP, moreover, the deficit has ballooned back toward its 3.1% average 2020 level from 2.0% of GDP last year.
Switzerland, by contrast, experienced a record high quarterly current account surplus of CHF 24.157 billion in 3Q, roughly 8% of GDP.
Italian industrial sales in October dropped 0.8% on month and recorded its smallest 12-month rate of increase in slightly more than a year.
Japan’s leading and coincident indices of leading economic indicators respectively rose to a 2-month high and fell to a 4-month low in October.
The U.S. index of leading economic indicators dropped by a greater-than-expected 1.0% in November and was the eighth decline in a row.
In central banking developments, the Central Bank of Turkey did not cut its one-week 9.0% repo rate further at this month’s review, adhering to the pause that was signaled earlier. The key interest rate had been slashed by a combined 500 basis points at the four previous monthly meetings on top of of 500 basis points of reduction in the final four months of 2021 from a starting level of 19.0%. “Considering the increasing risks regarding global demand, the Committee evaluated that the current policy rate is adequate. 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.” But with CPI inflation of 84.4% as of November, Turkish monetary policy has a credibility problem.
Indonesia’s 7-day reverse repo rate has been lifted by 25 basis points to 5.5% as was expected. This was the fifth hike since August less than each of the three prior increases of 50 basis points. At 5.5%, the rate is now two full percentage points above the pandemic low of 3.5% from February 2021 until August 2022 and is at its highest level in 13 years. CPI inflation in Indonesia of 5.4% is at a 3-month low but still above the 2-4% target range.
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