Federal Reserve Official Remarks Tamp Down Financial Market Optimism
January 10, 2023
Officials at the Federal Reserve forswear any intent to target financial market indicators like the dollar, share prices or long-term interest rates. Policy is to be guided by real economic trends and inflation. But in a tightening policy cycle, now ten months long in the tooth, market euphoria cannot be tolerated. After last Friday’s big swing into riskier assets following the good U.S. jobs report, it was predictable that officials would rhetorically counter speculation that with inflationary pressure falling now faster than assumed the Fed would be cutting rates sooner than implied. Presidents of the San Francisco and Atlanta Fed districts endorsed the view that the federal funds target is likely to crest above 5.0% and not begin to be lowered for a long time afterward. In order to target inflation and the labor market, the Federal Reserve reaction function cannot help but be tied to financial market developments. Now investors eagerly await a speech later today by Fed Chairman Powell at the Swedish Riksbank symposium on monetary policy.
Share prices in Europe and U.S. stock futures are down so far today by 0.5-1.0%. Stock markets closed down 1% in India and Indonesia, 1.3% in Singapore, and 0.2 to 0.3% in Hong Kong, China, and Australia. An outlier was the Japanese Nikkei, which rose 0.8% after yesterday’s holiday closure.
Ten-year sovereign debt yields have risen five basis points today in Germany, the Netherlands, France, Italy, Switzerland, Spain and the U.K. and by 3 basis points in the United States.
The dollar has thrived on risk aversion and today rose 0.4% measured by the DXY weighted index. The dollar climbed overnight by 0.7% against the Aussie dollar, 0.4% relative to the yen, kiwi, and sterling, 0.3% versus the loonie and Swiss franc, and 0.1% against the euro and Chinese yuan. With the dollar on the rise, gold fell back by 2.2%, but Bitcoin and WTI oil climbed 0.3% and 0.5%.
Among reported price data around the world this Tuesday,
- Brazilian CPI inflation dipped another 0.1 percentage point in December to a 22-month low of 5.8%, which compares to a 19-year high hit last April of 12.1% and 10.1% at the end of 2021.
- Norwegian CPI inflation slowed 0.6 percentage points to a 7-month low of 5.9% last month, having crested at a 35-year peak of 7.5% in October. But core Norwegian consumer price inflation edged up to 5.8%, and producer price inflation, although well down from last March’s record high of 79.4%, remains quite elevated at 18.7%.
- Armenian CPI inflation dropped a half percentage point to a 9-month low in December of 8.3%, two percentage points below last June’s 11-year peak.
- Egyptian consumer price inflation accelerated more sharply than forecast in December to a five-year high of 21.3%, more than triple the 5.9% pace at end-2021.
- Dutch CPI inflation, which hit a record high of 14.5% last September, printed 0.1 percentage point lower in December than November at 9.6%. That’s still above 5.7% in December 2021 and far above the ECB’s 2% target.
- Danish CPI inflation remained unchanged at 8.7% in December. From 3.1% at end-2021, Danish inflation had accelerated to a 479-month high of 10.1% in October.
- Core CPI inflation in Tokyo, which gets reported around three weeks earlier than national figures, rose 0.4 percentage points in December to 4.0%, its highest point since the early 1980s. Investors anticipate a further significant tweak of the Bank of Japan’s policy of yield curve control once Governor Kuroda’s successor takes over in April.
Bank of Japan Governor Kuroda has run the central bank for the past decade and does not believe that one can infer that sustainable inflation of 2% or more is yet at hand. He repeatedly cites the unresponsiveness of wages to the easy monetary policy stance. On-year growth in Japanese average cash earnings growth slowed from 1.8% in October to 0.5% in November. When adjusted for inflation, that translates to a 3.8% drop, which is the biggest slide in over eight years. Japan also reported today a 0.9% monthly decline in household spending during November.
New Chinese bank loans totaled 1.4 trillion yuan last month, beating analyst expectations and the most in three months, but M2 money growth slowed to a 5-month on-year low of 11.8%.
After dropping a combined 3.5% in September-October, French industrial production rebounded by a greater-than-expected 2.0% in November but was only 0.7% higher than its year-earlier level.
Similarly, South African factory output rose 2.0% in November after an even bigger slide in October. Output was 1.1% less than in November 2021.
Turkish industrial production fell 1.1% on month and 1.3% on year in November, marking the 12-month decrease in almost two and a half years. Swedish industrial production dropped 2.3% on month and 0.5% on year also in November.
Greek industrial production rose 1.0% in November but recorded a third on-year decline (-0.9%) in a row.
Small business sentiment in the United States deteriorated to a half-year low of 89.8 last month. Such had printed at 98.9 in the final month of 2021.
The tenth increase of the current tightening cycle in the National Bank of Romania‘s interest rate was undertaken today. The incremental rise was lowered to 25 basis points from the prior increases of 75 basis points in October and 50 bps in November. Tightening began in October 2021 from a base of 1.25%, but the new rate level of 7.0% remains well shy of CPI inflation, which at 16.8% as of November was the most since early 2003.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Federal Reserve rhetoric, National Bank of Romania, Tokyo CPI and Governor Kuroda
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